Market News

Treasury targets fiscal deficit reduction to 3pc in four years

imf

International Monetary Fund Kenya representative Jan Mikkelsen. PHOTO | DIANA NGILA | NMG

The Treasury aims to cut the fiscal deficit to three per cent by 2022, just a year ahead of the deadline to meet the preconditions for being part of East African Community’s monetary union.

According to the budget policy Statement for July 2018 to June 2019, the projection is that by June this year the fiscal deficit will be at 7.2 per cent and then fall progressively. Under the EAC pact, countries in the region are supposed to limit the deficit to three per cent when grants are included.

The Kenyan government is currently struggling to meet conditions on fiscal deficit set by the International Monetary Fund (IMF) with a Sh152 billion ($1.5 billion) balance of payment insurance facility under suspension.

“The fiscal policy also indicates our deliberate convergence path towards the East African Community Monetary Union Protocol’s fiscal targets. That is, the EAC targets of a fiscal deficit ceiling including grants of three per cent of GDP and excluding grants six per cent of GDP,” said the Treasury in the BPS.

In the fiscal year ending last June, the deficit stood at about nine per cent triggering alarm in many circles including at the IMF. During a hearing before Parliament’s Budget and Appropriations Committee, IMF resident representative Jan Mikkelsen said the government must cut its appetite for debt in order to keep it sustainable.

“We have raised concern over the high deficit levels now…high deficit generates more debt and the burden is increasing rapidly and becoming unsustainable,” Mr Mikkelsen told the committee.

Analysts believe that the government can cut the fiscal deficit to three per cent in three to four years but express concern that the willingness to do so is constrained by failure to make the required hard decisions.

Johnson Nderi, a manager with brokerage house ABC Capital, said in an interview that the government can reduce the deficit by selling some of its assets to raise funds to pay off the debt.

Servicing the debt constitutes one of the largest items on the recurrent expenditure, he noted. The Business Daily recently revealed that the country will be spending Sh1 trillion annually just to service the debt.

“The debt and payment of interest is a major driver of the high fiscal deficit and so if we start off by selling some of the assets owned by the state, then we can reduce the debt substantially. Consider the fact that our tax revenue don’t even cover our recurrent expenditure,” said Mr Nderi.

He urged the Treasury to carry out austerity measures that drastically cut the total expenditure, especially that of the recurrent type, in order to make it unnecessary to incur more debt.

“Above all, we need to foster economic growth. We should pursue pro-growth policies so that even revenues can increase. One major issue to tackle in this is to have less regulation,” said Mr Nderi.

“Licences are just being used to raise revenue and not for promoting business growth,” Mr Nderi said.

In terms of raising revenue, the Treasury says that it is going to undertake a combination of policy and administrative reforms to bolster revenue yields going forward. One of the proposed measures is to reform the Income Tax Act.

READ: Why Kenya could spend 80pc of Sh202bn Eurobond to repay loans