The Treasury will find it difficult raising 2020/21 domestic financing that is more than a quarter larger than in the ending fiscal year, meaning high chances of mid-term public spending cuts.
Analysts at Kestrel Capital say with the Treasury having mobilised Sh391 billion for this fiscal year, it will be a gruelling task to raise Sh493 billion proposed in the 2020/21 budget — that is an extra Sh102 billion or 26 percent.
While there is enough liquidity in the market to fund the deficit, this can only go to the government on the pain of starving the private sector of credit badly needed during the current economic slowdown projected to last the whole year.
Besides cutting lending to companies, the higher domestic financing could also reduce the value of transactions in the bond market, cutting the market’s attractiveness.
“The Treasury had already raised Sh391 billion domestically in fiscal year 2019/20 by borrowing Sh411 billion in Treasury bonds and paying back Sh20 billion in T-bills. The domestic target of Sh493 billion for FY20/21 was thus unrealistic,” said Alexander Muiruri in an analysis of the budget for the next State fiscal year.
“There is enough liquidity in the system to fund the deficit. However, there won’t be enough left to fund private sector credit and could reduce secondary market bond turnover.”
Besides the domestic financing, the Treasury plans to bridge the fiscal deficit through money from foreign entities. The budget has provided for net external financing amounting to Sh347 billion or 3.1 percent of the gross domestic product.
Kestrel Capital sees the chances that this deficit as indicated in the printed estimates could still change because of unforeseen shocks as well as the ongoing Covid-19 crisis. That is to say, the trend of adjustments in deficit financing in the budget in the fiscal year is likely to be maintained.
“The printed estimates do not account for unforeseen shocks experienced during the financial year and given the economic challenges brought about external shocks such as Covid-19 it’s hard to confidently say this trend will change,” says Mr Muiruri.