Kenya must tame the large budget deficit against the background of slowing growth and rising debt or risk losing investor confidence in the international credit markets, leading economists say.
The country has been forced to borrow heavily in recent fiscal years to finance infrastructure projects while tackling a huge recurrent expenditure budget, which has strained tax revenue and raised questions over the sustainability of public debt.
Economists Razia Khan of Standard Chartered, David Cowan of Citi and Jibran Qureishi of Stanbic Bank #ticker:CFC now argue that it is imperative that fiscal consolidation takes place, especially now that the country is preparing for another round of international debt issue.
“Kenya’s slowing growth profile raises the risks around its public debt-to-GDP ratio, although the overall amount is still considered sustainable.
Nonetheless, the recent extension of the syndicated loan demonstrates how important it will be to secure confidence in order to ease refinancing,” said Stanchart chief economist for Africa Ms Khan.
“This will be best done through efforts to achieve faster fiscal consolidation, which will now need to be a priority. In the absence of more rapid consolidation, Kenya’s external creditworthiness could suffer.”
The budget review and outlook paper released in September showed an upward revision of the budget deficit to Sh691.2 billion (Sh750.9 billion excluding grants) from the previous Sh535.5 billion for the current fiscal year.
This is largely due to expectations of reduced tax revenue, and supplementary spending on food imports, subsidies and elections.
Citi Africa economist David Cowan said the consolidation is likely the most pressing issue facing the administration at the beginning of its second term, warning that while debt levels are currently sustainable, the fear is that a shock could cause a problem.
According to Stanbic East Africa regional economist Jibran Qureishi, the fiscal consolidation should be aligned with more targeted spending on key growth areas, given Kenya will still need to develop her infrastructure to boost productivity and the economy.
“It is high time that public investment in infrastructure is recalibrated towards priority areas such as irrigation and power transmission to provide the much-needed support to the job creating sectors such as agriculture and manufacturing,” said Mr Qureishi.