Kenya’s tough finance balancing act

From what I gather in conversations with Treasury mandarins, the priority and indeed hope of the government right now is that the IMF board meetings on Kenya scheduled on October 30, will approve and precipitate immediate release of some Sh113 billion in commitment disbursements by the Bretton Woods lender.

The government urgently needs the cash to ease the fiscal pressures it endured especially in the months of July and August and as it approaches close of the first quarter of the financial year.

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Back to the subject of the current status of its financial position.

From the latest budget out-turn numbers published in the Kenya Gazette by the National Treasury, September was not a bad month in terms of pressure on cash-flows.

In the first place, the month's Kenya Revenue Authority collections were very high, reflecting the fact September is the period for corporation tax. The budget out-turn numbers show that KRA collected Sh525 billion in September.

Secondly, collections under the category, non- tax revenues were also impressive. The two most important items in this category were first, a dividend from the Central Bank of Kenya of Sh30 billion and secondly, a dividend from Safaricom of Sh9 billion.

The third major source of revenue for the government in the month of September was cash from domestic borrowing that included a Sh32 billion tap sale from an infrastructure bond that was issued in August.

Finally, external loans mainly inflows on donor funded programmes, precipitated injections of Sh24 billion into cash-flows.

With strong revenues, the month of September was consequently also good in the financial performance of the expenditure side.

The budget out-turn numbers show the National Treasury resumed payments it had failed to make in August due to heightened fiscal stress.

This is reflected in enhanced total issues to county governments and payments of arrears to devolved units from the last fiscal year. Expenditure of payment of pensions also recorded an improvement in the month.

Are we out of the woods? No. Basically, the government is still living from hand to mouth, merely surviving by building up arrears on payments to counties, constitutional offices, and pensions and by freezing spending on development budget.

I have heard some pundits touting the fact that the shilling is holding out against the US dollar- and that Central Bank of Kenya’s forex reserves have recently been on an upsurge- as signs of green shoots of recovery of our economy.

This is how one pundit put it to me: ‘there is a lot of foreign investor funds looking for yield and being invested in Kenya. Furthermore, the currency seems to be stable and CBK reserves are up by Sh1 billion. Clearly, something is going right in this economy’.

Should we be celebrating the fact that the shilling seems to be holding out to the US dollar? Does this trend signal green shoots of economic recovery? I don’t think so. The fact that the shilling seems to be holding out against the dollar is a sign of weakness and lack of dynamism in our economy.

Three factors are at play. First, stagnation and low economic activity has caused import demand to fall precipitously and hence low demand for dollars.

Secondly, the CBK appears to be taking advantage of a flush forex market to build up reserves in anticipation of any shocks either in the medium term or in the future.

Thirdly, tactics by yield-hungry investors looking for bargains in inefficient and highly volatile markets like ours- and comforted and by CBK’s aggressive FX build up strategy. For the yield investors, CBK’s FX build up strategy means it will in future have enough reserves to facilitate bond redemptions.

Mark you, yield investors are a peculiar breed because as opposed to equity investors who seek capital growth, yield investors are driven only by yield.

Another reason we could afford to postpone signing on the Emirati bailout money is the fact that September was a good month in terms of revenues. The likelihood is that we will snap it up once the IMF is aligned.

The writer is a former managing editor at The EastAfrican