Running a large deficit forces the government to borrow more (effectively printing money), which leads to devaluation and in turn starves the private sector of the credit needed to grow the economy.
Mr Cowan gave an example of Ghana and Zambia, where large twin fiscal and current account deficits have slowed down growth and caused massive depreciation of the respective currencies against the dollar.
Many African countries eased fiscal policy following the 2008-09 global financial crisis, and are struggling to get it back under control.
Kenya’s large budget deficit poses a risk to growth and stability the shilling has enjoyed over the past two years as the country borrows more to finance expenditure, a Citi economist has warned.
Citi Africa economist David Cowan said the country can ill-afford to run a deficit above seven per cent — as was the case in the last fiscal year at 8.9 per cent — and should instead aim for a deficit below five per cent.
Running a large deficit forces the government to borrow more (effectively printing money), which leads to devaluation and in turn starves the private sector of the credit needed to grow the economy.
Mr Cowan gave an example of Ghana and Zambia, where large twin fiscal and current account deficits have slowed down growth and caused massive depreciation of the respective currencies against the dollar. Many African countries eased fiscal policy following the 2008-09 global financial crisis, and are struggling to get it back under control.
“Kenya has just about played it right but cannot continue at the current rate. Whoever wins the next election will have to stand up and bring the fiscal deficit under some degree of control,” said Mr Cowan.
“If you don’t bring it under control it will come back to haunt you. You should be aiming for a fiscal deficit in the order of three to five per cent. Once it starts going above seven per cent it becomes a problem.”
The shilling has so far bucked the trend among African currencies by remaining relatively stable against the dollar in the past two years, exchanging in the range of 100 to 105 units.
In this year’s budget, the government is targeting a fall in the fiscal deficit to the tune of 2.6 percentage points to 6.3 per cent, although going by past example this may be tough to achieve.
In the last fiscal year the Treasury had targeted a deficit of 6.9 per cent, which ended up at 8.9 per cent.
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