The Treasury has adjusted its domestic borrowing costs upwards by Sh180.6 billion to finance its Sh3.973 trillion budget amidst flagging tax revenues.
Projections in the Budget Policy Statement 2025, or BPS 2025, show that net domestic borrowing target is now Sh593.7 billion from Sh413.1 billion, as the government takes advantage of the lower interest rates to ease its financing pressures.
Interest rates had risen, with investors lending the government at a high of 18 percent with the Central Bank of Kenya's effort to fight high consumer prices, reducing liquidity in the market.
The Treasury has however slashed the amount of taxes it expects to collect by Sh55.5 billion to Sh2.575 trillion amid a tough business environment that has already seen it fall short of its target in the first six months of the current financial year.
Besides the contraction of credit to firms and households which has had a knock-on effect on the economy, tax collection has also been hampered by the anti-tax protests that saw President William Ruto suspend the ambitious Finance Bill 2024 that sought to raise Sh330 billion in additional taxes.
The State is optimistic a reduction in interest rates will help ease fiscal pressures by lowering both its borrowing costs and that of businesses.
“Interest rates have begun to decline as a result of easing of the monetary policy, reducing borrowing costs and freeing up fiscal space for growth-enhancing initiatives by businesses,” said Treasury in the BPS.
The decline in interest rates is the reason the global rating agency Moody’s changed Kenya’s outlook for its creditworthiness to positive from negative, citing reduced liquidity risks even as access to the financial market has improved.
A positive outlook means the US-based rating agency is less likely to downgrade Kenya’s rating on its foreign-currency debt in its next review, a major relief to President William Ruto’s government which has been desperate to send signals of fiscal discipline to investors.
“Domestic financing costs have started to decline amid monetary easing and could continue to do so if the government sustains its more effective management of social demand and fiscal consolidation,” said the rating agency.
Fiscal consolidation is a policy aimed at reducing the budget deficit by increasing tax revenues and cutting spending, a goal Kenya has been keen to achieve with the help of the International Monetary Fund.
Total spending is expected to increase by Sh92.4 billion from the Sh3.88 trillion with a big chunk of the increase being in recurrent spending including administrative costs.
Recurrent spending has increased by Sh111.6 billion while development expenditure, critical for economic growth, is slashed by Sh9.7 billion, in the yet-to-be-tabled second supplementary budget.
Because the government is not allowed to spend borrowed cash on recurrent expenditure, much of the increased spending is expected to come from non-tax revenues including fines and fees from state corporations, or appropriation-in-aid (A-I-A).
Under the changes made by the Treasury, A-I-A is expected to increase by Sh55.7 billion to Sh484.4 billion.
Despite a raft of policy changes made through various legal instruments, including the Tax Law (Amendment) Act and the Tax Procedure (Amendment) Act, the Treasury has slashed its projection on tax collection by Sh55.5 billion to Sh2.575 trillion.
In Supplementary Budget Estimates I, tax collection was projected at Sh2.63 trillion.
However, the government is more bullish in the upcoming financial year starting July, with a budget of Sh4.78 trillion that will be financed mostly through taxes amounting to 2.835 trillion.
Tax collection in the 12 months to June next year is expected to increase by around Sh259.1 billion as the economy recovers from a high-interest environment that is estimated to have slowed down economic growth in 2024, according to most forecasters.
