The Treasury’s outstanding overdraft at the Central of Bank of Kenya (CBK) hit a fresh high of Sh64.05 billion on April 9, new data shows, highlighting the pressure from underperforming tax revenue streams amid rising demands for money to boost the ongoing fight against the Covid-19 pandemic.
CBK’s latest data shows that the Treasury tapped Sh33.58 billion from the overdraft facility between March 1 through April 9 - a reflection of reduced inflows from government securities and tax receipts.
This coincided with the official announcement of the outbreak of the global pandemic in Kenya on March 12.
Money accessed from the overdraft, which is a temporary source of funds to cater for emergencies and priority payments, helps the Treasury finance short-term needs such as salaries and other recurrent expenditure like debt repayments. It is also used by the Treasury when revenues from other sources are not flowing quickly into the Exchequer yet spending demands arise.
The amount tapped by the Treasury from the CBK overdraft between March 1 and April 9 was higher than the Sh23.33 billion netted from Treasury bonds in the review period while government borrowing from the weekly sale of Treasury bills, which are repaid between three and 12 months, dropped by Sh23.33 billion, pointing to low investor appetite amid maturities between March and April.
The emergency lending, which is regarded as direct creation of cash by the CBK, is ideally meant to be restricted to a maximum of five percent of the most recently audited revenues. It is also expected to be repaid by the end of the fiscal year.
Economists have warned against excessive use of the overdraft facility, arguing that it is tantamount to printing money – with the attendant risks of creating inflationary pressures.
Back in 2012, for example, former CBK governor Njuguna Ndung’u wrote in the Kenya Financial Sector Stability report that “accelerated borrowing from central bank is inflationary as it is equated to printing of money and therefore leads to macroeconomic instability through inflationary pressures.”
The increased use of the facility points to a cash crunch being faced by the Treasury amid under-performing ordinary revenue streams such as taxes, fines, levies, rent of buildings and forfeitures which underperformed the set target by an estimated Sh132.3 billion in nine months of the current financial year through March to Sh1.22 trillion.
These lower-than-expected revenue inflows reflect a slowdown in business, a trend that had started manifesting even before the Covid-19 pandemic came knocking, forcing health authorities to put in place sanitary measures to stem its spread.
For example, tax collections by the Kenya Revenue Authority (KRA) suffered a rare drop in the January-February 2020 period, falling by Sh3.51 billion to Sh216.06 billion compared with Sh219.56 billion in the same period a year earlier, Exchequer data showed on March 20.
Business deals in the private sector — mirrored through the monthly Stanbic Bank Kenya’s Purchasing Managers Index (PMI) — posted back-to-back declines in the first three months of 2020. In March, businesses suffered the sharpest drop in activities since October 2017 when the economy was similarly running at half-throttle due to tensions emanating from a fallout over historic repeat presidential poll.
In the first quarter, headline PMI, based on feedback from corporate managers, fell for the third month in a row to 37.5 in March from 49.0 in February and 49.7 in January. That was the second lowest level in the history of PMI (which started in February 2014), which measures deals such as production, new orders, order backlogs and employment. It was second to October 2017 when it hit a rock-bottom 34.4 level due to the repeat presidential election.
PMI readings above 50 signal an improvement in business conditions over the previous month, while those below 50 show deterioration.
Reduced business activity as a result of the infectious coronavirus-induced partial trade and travel restrictions is expected to deplete tax revenue further, compounding the losses as a result of reduced tax rates for workers and businesses as well as consumption tax.
“Many surveyed businesses noted that worries surrounding the virus meant that customers cancelled or reduced new orders, leading to a steep fall in total sales that was the second-sharpest on record,” Stanbic said in a statement.
“Consequently businesses reduced activity and employment, while demand for inputs fell at the quickest pace since late-2017.”
The debilitating impact of the sanitary measures to stem spread of the contagious virus on economic activities has seen the International Monetary Fund cut 2020 growth projection to one percent from six percent, CBK has lowered its forecast to 3.4 percent from its initial 6.2 percent, while Treasury provisionally slashed its forecast to 3.6 percent last month.
The Parliamentary Budget Office (PBO) — a unit that advises lawmakers on financial, budgetary and economic matters — has warned it may take several months for the Coronavirus-induced economic shocks to fade even after the virus is contained, arguing that the pace of Kenya’s recovery will depend on how the pandemic will be defeated in its trading partners.