Capital Markets

Treasury bid for low deficit an uphill task

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The National Treasury building in Nairobi. FILE PHOTO | NMG

The Treasury is expecting to have the lowest fiscal deficit in more than five years, during which it has mostly exceeded its own initial estimates.

The deficit has been put at 5.7 per cent but the target in the year ending this month is projected to be missed, just as has been the case in all the fiscal years since June 2014 except in the one ended June 2016.

The missed targets raise questions as to whether the gap that Treasury secretary Henry Rotich has announced is going to be met, which in turn means there could be more pain for Kenyans in terms of more tax along the way before the end of the next fiscal year.

Analysts reckon the reduction in the deficit, with a lower domestic borrowing, if followed, would encourage private sector credit.

Domestic borrowing is planned to be Sh271.9 billion compared to Sh297.6 billion expected for the fiscal year ending this month — indicating a reduction of nearly Sh26 billion.

“Government is looking at reducing the budget deficit to 5.7 per cent in 2018/19 (7.2 per cent in 2017/18). This should manage the crowding out effect of the private sector,” said KPMG in its analysis of the budget for the next year.

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An analyst with an investment bank said deficit targets were unlikely to be met due to a weak fiscal trajectory and discipline where changes are made in the middle of the year and leakages continue through corruption or money that cannot be accounted for.

“They are unlikely to hit the target. It is a historical problem. You find that even with increases in various taxes, the gap still cannot be closed because of this weak trajectory and lack of fiscal discipline,” said the analyst.

For the 2017/18 fiscal year that ends this month, Mr Rotich initially set the deficit at 6.2 per cent but is now likely to end the year at 7.2 per cent or Sh85 billion. More spending is planned with the total deficit expected to stand at Sh620.8 billion.

In the 2016/17 fiscal year, the deficit was initially set at 6.1 per cent but exceeded this by nearly four percentage points to stand at 10.6 per cent — underlining the extent to which the National Treasury has underestimated the task of financing the national budget.