The national Budget is set to rise 25 per cent in the 2012/13 estimates to Sh1.45 trillion from Sh1.16 trillion this year, fuelling pressure on the shilling because the government is a big importer of goods and services. Photo/File
The Treasury should cut public spending to ease pressure on the shilling, economic analysts at Citigroup have said, following the latest wave of weakening of the local currency.
The national Budget is set to rise 25 per cent in the 2012/13 estimates to Sh1.45 trillion from Sh1.16 trillion this year, fuelling pressure on the shilling because the government is a big importer of goods and services.
The budget deficit of Sh332 billion also represents an increase to about eight per cent of the gross domestic product from seven per cent.
It is set to be financed mostly through foreign funding of Sh225 billion and domestic borrowing of Sh107 billion.
“Monetary policy has been over tightened to compensate for fiscal policy laxity,” said Citigroup head of research on Africa David Cowan in a presentation made to the bank’s customers last week.
The higher spending by government has seen the Treasury plan to raise the foreign component of the new debt by 92 per cent to about Sh225 billion from Sh117 billion in the current financial year, which increases the outflow in dollar repayments in the medium term.
The shilling has started to depreciate after four months of relative stability, with analysts pointing to high import demand and a decline in the Treasury bill rates.
Citi analysts, however, maintain that the fiscal deficit and the high import-export gap are key underlying factors to the depreciation.
On Thursday, the shilling hit a four-month low of 87.90 units to the dollar.
Citi points out that the problem of fiscal deficits is also present in Uganda and Tanzania, where the central banks have been forced to keep interest rates high in order to tackle excessive volatility on the currency.
He said that in view of the deficits and political pressures to spend, “only modest fiscal consolidation (cutting spending) is likely in East Africa”.
Mr Cowan, however, said that it is likely to be more difficult to tighten fiscal policy in Kenya, compared to the other two countries, because it is only months to the General Election.
“Fiscal tightening should probably happen more easily in Tanzanian and Uganda compared to Kenya, given their position in the political, and hence fiscal, cycle,” said the economist.
The 2012/13 deficit is 41 per cent, or Sh96 billion, higher than in this financial year. The Treasury has projected the most optimistic estimation of Kenya’s economic growth rate this year, at 5.5 per cent.
In the Budget Policy Statement released in April, the Treasury says that it wants to increasingly rely on the private sector, through public private partnerships, to slow down government expenditure.
The policy statement blames the rising expenditure on the pressure for higher wages, the Constitution, security operations and weakening of the shilling-dollar exchange rate for increasing debt repayments amounts.
“Additional spending expenditures have emerged, mainly on salaries, implementation of the Constitution, as well as dealing with security operations along the border and in Somalia, among others,” said the Budget Policy Statement.
To show the pressure to increase spending, the budget statement added that by during the 2011/12 fiscal year, the Treasury had “received requests for additional funding amounting to over Sh175 billion.”
The upcoming elections – which normally raise spending – and implementation of the new constitution have put the Treasury in a tight spot.
“This [political issues] does seem to be acting as a brake on fiscal consolidation,” Dr Cowan said.
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