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Ideas & Debate

How to deal with challenges facing Kenya fiscal policy

Over the past few weeks Kenya’s fiscal management has been under domestic and international scrutiny particularly in regard to the Eurobond.

However, what has been lacking in the conversation is a look at overall fiscal policy and how it has informed the steering of the economy.

There are three core anchors that can be useful when analysing the fiscal policy: planned expenditure, fiscal deficits and revenue generation. These will allow an elucidation of the prudence of fiscal strategy.

First, in terms of planned expenditure, annual fiscal budgets have consistently been increasing year-on-year. In 2012/13 the budget stood at Sh1,459.9 billion, in 2013/14 Sh1,640.9 billion, 2014/15 Sh1,773.3 billion and for 2015/16 a massive Sh2.2 trillion. Noting these consistent increases is important as it puts pressure on the government to increase revenue generation.

Secondly, yearly increases in planned spending have been correlated with growing fiscal deficits: 6.5 per cent in 2012/13, 7.9 per cent in 2013/14, 7.4 per cent in 2014/15 and 8.7 per cent in 2015/16.

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It is important to note the Treasury has been consistently flouting its five per cent fiscal deficit target.

Thirdly, as of October 2015 according to Standard & Poor’s, the fiscal deficit has already exceeded what government intended and stands at a much higher estimate of 9.4 per cent.

Finally, the rise in fiscal deficits is occurring in a context of decelerating GDP growth: 2012 GDP growth was 6.9 per cent, 5.7 per cent in 2013, 5.3 per cent in 2014 and this year we’re hoping to hit 5.4 per cent.

This anaemic performance fuels anxiety around growing fiscal deficits. How will government sustainably finance growing fiscal deficits in the context of a slowing economy?

Further, this year Treasury aimed to finance the deficit through external financing of Sh340.5 billion and domestic financing at Sh229.7 billion (60/40 ratio).

Though understandable, debt heavily denominated in foreign currency is bound to be strenuous to service because as an import economy, a scarcity of FX weighs on Kenya.

However, although the government stated most funds would be sourced externally, it has since signalled it will borrow heavily in domestic markets as well, partly to service the fiscal deficit, one presumes.

Therefore, not only are Kenyans being pushed out of domestic borrowing markets by the government, there is added pressure to raise foreign currency to service the fiscal deficit portion sourced externally.

Thus, the economy will be hit both by hikes in interest rate due to aggressive domestic borrowing by government.

Although government budgets have been increasing yearly, revenue generation has not been growing at par. In 2012/13 KRA collected Sh800 billion, in 2013/14 Sh963.7 billion, in 2014/15 Sh1.001 trillion. This year KRA targets Sh1.358 trillion; juxtapose that with the 2015/16 budget of Sh2.2 trillion.

Already there are signs this year’s targets will not be met; it emerged that the Kenya Revenue Authority missed its revenue target by Sh28 billion shillings for the first quarter ending September.

One can guess the government may experience difficulty in not only financing future ballooning budgets, but also meeting the debt-servicing obligations of both domestic and foreign denominated debt, including that linked to the fiscal deficit.

There is an extent to which fiscal strategy has informed the squeeze the economy is facing. Improvement can be done by lowering planned expenditure and controlling spending, lowering fiscal deficits and ensuring revenue generation is at par with planned expenditure.

Were is a development economist. [email protected]

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