Treasury overshoots annual domestic borrowing target

The Treasury last month surpassed its annual domestic borrowing target by Sh49.2 billion as it moved to plug revenue shortfalls in the wake of continued underperformance of tax revenues, newly released data show.

Net domestic borrowing hit Sh446.6 billion in May - one month before the end of the fiscal year - against the annual target of Sh397 billion, according to the latest official data.

The Kenya Revenue Authority (KRA) has since the beginning of the current financial year been struggling to meet its revenue target, forcing the government to borrow locally to fill the financing gaps.

The KRA had in the 11 months to May collected Sh987 billion, translating to an average Sh89 billion a month and more than Sh200 billion below the annual target of Sh1.2 trillion just one month before the end of the fiscal year. 

The lag in revenue collection may also be behind the Treasury’s decision to backdate several taxes that were introduced through the Budget Speech two weeks ago.

A number of local and international agencies have expressed concern over Kenya’s ever rising appetite for borrowing to finance the government but the Treasury insists that the debt level is still manageable.

“Increasing public borrowing may result in undesirable fiscal consequences such as high interest rates, inflation and overburdening future generations,” Agnes Odhiambo, the Controller of Budget, warned in a report published late last year.

The acceleration in domestic borrowing was mainly the result of continued growth of obligatory expenses such as debt repayment and pension payouts, forcing the government to allocate them extra funds.

The Treasury’s data indicate that by the end of May, Kenya had spent Sh387 billion on public debt servicing against the annual target of Sh397 billion.

The Treasury has since revised the debt servicing budget to Sh417 billion – meaning more money is required to meet the debt obligations.

The increase in debt repayment budget by Sh20 billion is attributed to the shilling’s loss of value against the US dollar (for foreign loans) and high domestic interest rates regime (for local borrowing) in the first half of the financial year.

The Kenyan currency hit a low of Sh106 in September compared to Sh90 in January last year. It is currently trading at Sh101 to the greenback.

Official data also show that the Treasury had by end of May overshot its pensions budget, having paid out Sh44 billion against the Sh38 billion it had planned to spend on retired civil servants.

READ: Pension headache for State as 32pc of workers retire

The government’s cash problems began in the first half of the year as underperforming taxes coincided with a steep rise in interest rates on the home front. By October 2015, yields on 91-day, 182-day and 364-day bills had all climbed above 22 per cent.

The resulting cash crunch caused a delay in payment of salaries to government workers, postponement of projects and non-disbursement of money due to the county governments.

Though interest rates came down in the second half of the year - to an average 7 per cent for the 91-day Treasury bills last week – pressure to borrow has yet to subside, mainly because of the lag in revenue collection.

The accelerated domestic borrowing has, however, been mostly used to fund the recurrent budget, meaning the country is borrowing for consumption.

The Treasury in a mini-budget submitted to Parliament in March slashed its development expenditure budget by Sh49.1 billion, even as it expanded recurrent spending.

President Uhuru Kenyatta’s Jubilee government had initially planned to spend Sh389 billion on development but this has since been cut to Sh342 billion. Only Sh230 billion of the budgeted amount had been disbursed by the close of May.

Kenya’s domestic debt stands at Sh1.76 trillion or slightly more than half the total debt of Sh3.2 trillion.

The increased local borrowing adds to the heavy foreign loans the government has been taking for projects such as the standard gauge railway (SGR) and which have raised concern over Kenya’s ability to pay.

The World Bank recently warned that non-concessional loans from China have reached a threshold where it risks making Kenya’s debt load unsustainable.

“Kenya still has a heavy debt burden and China’s loans can bring debt to unsustainable levels. Some of China’s loans are non-concessional, which can raise debt-to-gross domestic product (GDP) levels quickly,” World Bank lead economist for Kenya Apurva Sanghi said.

READ: World Bank warns Kenya over rising appetite for Chinese loans

A heavy debt load means more tax revenues will be used to settle loans, leaving little on the table for development.

At Sh387 billion, the amount used to settle public debt is 39 per cent of the total tax revenues the KRA had so far collected.

It does not help that the debt servicing burden is set to increase once foreign loans like the Sh427 billion the government took from the Chinese for the construction of the SGR fall due in the coming years.

The Treasury has in the past said that it prefers borrowing externally as foreign debt is cheaper and often comes with grace periods.

Kenya’s domestic debt market has no grace period, and its costs continue to rise with the prevailing high interest rates.