Markets

Economists warn Treasury must start cutting expenditure

nt

The Treasury is likely to be constrained to achieve its goal of cutting the budget deficit to five per cent in the fiscal year 2017/18. PHOTO | FILE

Summary

  • Piling up spending risks making debt unsustainable and the shilling weak.

Kenya’s reluctance to reduce spending is raising the risk of the country’s debt becoming unsustainable and may put renewed pressure on the shilling, economists have warned.

The Treasury had targeted to implement cutbacks in public spending beginning the current fiscal year, taking into account a rising debt-to-GDP ratio that has come about due to the need to finance a ballooning budget deficit.

Citi and Renaissance Capital have therefore warned of likely pressure on the shilling — which has otherwise remained stable over the past one year — and the possibility of Kenya’s external debt risk being reclassified to moderate from the current low.

Renaissance Capital sub-Saharan Africa economist Yvonne Mhango says the budget deficit at 8.6 per cent is already significantly wider than those of other East African countries, with costs associated with devolution and infrastructure projects largely to blame.

“Part of the reason may be devolution which Kenya started to implement in 2013, which has contributed to expenditure being higher than was the case previously, this being on top of the public investment that we are seeing,” said Ms Mhango.

“The concern is as to when fiscal consolidation will begin… it was meant to start in the current fiscal year starting July but instead the government put out an expansionary budget. The larger deficit means higher debt for Kenya, which already has a debt-to-GDP rate of around 55 per cent.”

Citi analysts say in their latest note on African economies that the shilling and other regional currencies may come under pressure should the price of oil rebound, a situation which would also lead to a reversal of the narrowing of the current account deficits recorded last year.

READ: IMF warns Kenya of Sh313bn undisclosed debt risk

Higher external debt puts pressure on the local currency because repayments eat up dollar reserves.

There is also some political risk. The government is unlikely to rein in spending ahead of the elections given the pressure it faces to show the electorate that it is carrying out projects to fulfil promises made in 2013, while businesses may also become cautious if the pre-election rhetoric becomes acrimonious.

“If the current account were to widen again in 2017, notably as the oil import bill picks up, then this may see some of the currencies coming under pressure again, notably the Kenyan shilling if there were to be any political noise around the elections,” says Citi.

The Treasury is clearly likely to be constrained to achieve its goal of cutting the budget deficit to five per cent in the fiscal year 2017/18.

The government plans to borrow up to Sh503.1 billion from external lenders in the current fiscal year and domestic borrowing of Sh241 billion (with debt repayments at Sh55 billion) in order to plug a budget deficit of Sh689 billion.

Data compiled by Kestrel Capital shows the government had already made net borrowing of Sh74 billion from the domestic market by the end of September.

The Treasury has said that it is delaying external borrowing as it waits for rates to become more favourable.