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Budget deficit tipped to fall below 6.3pc

NT

The National Treasury building in Nairobi. Cutting the fiscal deficit has been a thorn in the side of the Treasury in recent years. FILE PHOTO | NMG

The fiscal deficit is likely to come in below the Treasury estimate of 6.3 percent by the end of the financial year if the poor absorption of expenditure continues, an investment bank has said.

Genghis Capital analyst Churchill Ogutu said in a note on public debt that with absorption of both recurrent and development expenditure below 50 percent at the halfway mark of the fiscal year, the effect of subpar revenue performance will likely be muted.

In the six-month period, the government used up 44.6 percent of the budgeted funds for recurrent items, while development spending was lower at 30.6 percent, partly attributed by the analyst to the presidential directive to compete old projects before starting new ones.

"Overall expenditure and net lending was Sh55.2 billion lower than the target at the half-year mark … we thus estimate a fiscal deficit of six percent at the end of the 2018/19 fiscal year, down from 7.2 percent at the end of 2017/18, which in our view will be on account of sub-par expenditure performance outpacing underperformance in revenue collection,” said Mr Ogutu in the note.

“Recent trends indicate that, although revenue performed 7.1 percent below target in the last four fiscal years, fiscal consolidation was achieved mainly by an expenditure performance that trailed its target by 10.9 percent.”

Missing targets

Cutting the fiscal deficit has been a thorn in the side of the Treasury in recent years, continually missing targets due to a growing public wage bill and repeated struggles to hit 100pc collection.

The pressure to raise revenue performance has forced the Kenya Revenue Authority to significantly scale up efforts to nab tax cheats and widen the tax base, while a raft of tax rates have been revised upwards in recent budgets.

With public debt growing fast, however, and questions coming up over its sustainability, pressure has gone up on Treasury mandarins to find a way to narrow the deficit and reduce reliance on new debt to run the exchequer.

Of particular concern is the growth in external debt, which now accounts for 51.7 percent of total public debt of Sh5.27 trillion. This debt, unlike domestic borrowing, is exposed to foreign exchange risk meaning it could shoot up should the shilling weaken significantly against the dollar.