Kenya plans project expenditure cuts in next mini budget

The Treasury for the first time plans to table a supplementary budget withdrawing cash from ministries following a slow rollout of projects and revision of spending targets.

At the end of December ministries had not spent Sh139.2 billion earmarked for development projects. The government now plans to slash Sh70 billion from the development budget in a move that is likely to hurt economic growth.

“It is more on the issue of absorption — recognition that we have not been able to spend as much as anticipated but mechanisms have been put in place to improve the absorption levels,” said Finance PS Kamau Thugge.

The Treasury will also reduce recurrent expenditure by Sh23 billion, which it termed non-productive costs.

An economist criticised the Treasury’s decision to cut more from the development budget arguing this would affect future economic growth prospects.

“It means the expansive ability of the economy will reduce because when you put money in development you create an environment to grow faster as opposed to consumption,” Dr X.N Iraki, a senior lecturer at University of Nairobi, told the Business Daily.

Foreign-financed projects will be the most affected with the Treasury withdrawing Sh41 billion from them.

Spending cuts follow government’s failure to meet its tax and local borrowing targets.

The Treasury has now lowered its domestic borrowing target by Sh53.3 billion after low subscriptions in the first six months of the fiscal year forcing it to borrow more from abroad.

Finance secretary Henry Rotich plans to borrow Sh168.2 billion in the local market down from the Sh221.5 billion target he had set in the budget last June.

As at the end of December the Treasury had borrowed a net of Sh26.3 billion from the domestic market against a target of Sh106.6 billion. The government had received a total of Sh139.7 billion from the local market but had spent bulk of it to repay maturing securities leaving it Sh80.3 billion behind target.

“Cutting domestic borrowing was critical to stabilising interest rates,” said Dr Thugge.

READ: January domestic borrowing down Sh10bn on bond maturities

Local lending rates had surpassed the 20 per cent mark in September and October as government sought to deal with a cash crunch resulting from previous low subscriptions.

Attempts to catch up with the local borrowing plan pushed interest rates up while crowding out the productive private sector from bank borrowing as investors sought to take advantage of perceived government desperation.

The Treasury has disclosed it is weighing issuing a shariah compliant Sukuk bond — that requires extra legislation—or a Samurai bond in the Japanese market.

There have been concerns foreign investors would demand higher returns to lend to Kenya due to well-publicised claims of proceeds from the country’s debut Eurobond being stolen. The bond is already trading at high yields in the secondary market as a consequence.

Kenya raised a total of Sh275 billion through a Eurobond issued in 2014.

The Treasury has also been toying with the idea of issuing a retail mobile-based local bond, dubbed M-Akiba, for the last five months. Issuance of the bond was postponed after spiking of interest rates with Mr Rotich saying plans are underway to sell the five-year security in March. M-Akiba was expected to raise Sh5 billion.