Treasury slashes borrowing for budget to seven-year low

The Treasury has set an ambitious target to cut borrowing for the budget beginning July 1 to a seven-year low of Sh703.9 billion.

In new budget documents, the exchequer expects total financing for the next budget to come down from Sh785 billion in the current financial year, setting the lowest level of deficit financing since the 2017/18 financial year.

The plan to lower the fiscal balance rests on a higher revenue projection where the exchequer sees total revenues rising to Sh3.435 trillion from the current target of Sh3.07 trillion.

The ambitious revenue collection target is backed by expectations to raise ordinary revenues to Sh2.948 trillion, from the current estimate of Sh2.624 trillion.

Treasury Cabinet Secretary (CS) Njuguna Ndung’u says the new budget will be delivered partly from fresh tax-raising measures detailed in the medium-term revenue strategy.

“As part of the process, the government has embarked on the implementation of the National Tax Policy and the Medium-Term Revenue Strategy (MTRS), that will further strengthen tax revenue mobilisation measures efforts to over 20 percent of Gross Domestic Product (GDP) over the medium term. In addition, tax administration measures by the Kenya Revenue Authority (KRA) will be strengthened through scaling up the use of technology to seal leakages,” Prof Ndung’u says.

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Spending in the 2024/25 Financial Year has been estimated at Sh4.188 trillion, making the next budget the largest on record, surpassing the current estimates on expenditure and net lending at Sh3.9 trillion.

Recurrent spending in the cycle makes the lion's share of the spending plans at Sh2.859 trillion while spending on development has been estimated at Sh877.8 billion.

As financing requirements drop, the exchequer expects to borrow Sh326.1 billion externally instead of Sh362.2 billion as earlier planned, signalling a reduced accumulation of external loans and the accompanying foreign exchange risk exposures.

Meanwhile, net domestic financing has been set at a lower Sh377.7 billion from Sh422.7 billion under current estimates, cutting the dominance of the government in the domestic credit markets.

Subsequently, the fiscal deficit as a percentage of GDP is expected to decline to 3.9 percent from 4.9 percent in the current fiscal year, firming down the exchequer’s ambition for fiscal consolidation to achieve sustainable debt levels.

Chronic misses in the revenue target will, however, be the exchequer’s Achilles heel, potentially upsetting plans for Kenya to significantly cut its reliance on debt to fund the national budget.

For instance, by the end of December 2023, total revenue collected including ministerial appropriations in aid totalled Sh1.313 trillion against a target of Sh1.452 trillion, representing Sh139.3 billion in missed targets.

“This performance is attributed to a shortfall recorded in ordinary revenue of Sh186.2 billion. All ordinary revenue categories recorded below target performance during the period under review,” the Treasury indicated in its quarterly economic and budget review report covering the quarter to December 2023.

Missed tax targets have been despite the implementation of the 2023 Finance Act that targeted boosting revenue collection to at least 16.3 percent of GDP by end of June this year.

The government has been eyeing the implementation of a mix of tax administrative and policy measures to boost revenue collection efforts by KRA to over Sh4 trillion in the medium term.

Previous missed revenue targets have resulted in an escalation of borrowing to fund the expanded fiscal deficit, derailing exchequer fiscal consolidation plans.

For instance, the exchequer pushed debt financing for the 2020/21 budget from an original Sh841.1 billion to Sh950.2 billion after a significant shortfall in revenues.

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Alternatively, missed revenue targets have meant notable budget cuts which have mostly translated to reduced spending on development including the putting up of infrastructure such as roads and bridges.

The Treasury expects to keep a check on the fiscal balance over the medium term with debt financing expected to drop further to Sh666.7 billion in the 2025/26 Financial Year before rising moderately to Sh771 billion in the financial year ending in June 2028.

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