By Kevin Motaroki
Kenya’s ambitious revenue and expenditure targets in 2018/19 budget will be challenging to deliver. Moreover, because the medium-term outlook for public debt remains broadly unchanged, government debt will remain elevated at around 60% of GDP, according to a report by Moody’s Investor Service.
This is given impetus by the idea that it is unlikely that government can, in the foreseeable future, reverse the erosion in fiscal metrics that caused the rating agency to downgrade Kenya’s rating to B2 in February.
Lucie Villa, a senior credit officer and vice president at Moody’s, foresees a reduction in the fiscal deficit to 5.7% of GDP, from an estimated 7.2% in the previous financial year.
While this is portends better performance, implementation risks associated with some of the budget’s revenue and spending measures will challenge the achievement of fiscal consolidation, with a projected stable fiscal deficit of around 7% of GDP.
Government expects that an expanded tax base – the revenue authority has said it is ‘confident’ it will meet its revenue targets this year – will drive fiscal consolidation. It also banks on increases in import and excise duties to provide additional funding. This is risky, warns the agency.
“Implementation risks firstly stem from the budget’s reliance on a “spontaneous” increase in revenue from improvements in tax collection, and, as a result, a broadening of the tax base. New measures from increases in import duties and excise rates can only have a limited, positive impact on the government’s fiscal balance,” says Lucille.
What is more, the budget forecasts a limited increase in primary recurrent spending – the net of an interest of +5.6% year-on-year – which is broadly on par with inflation.
But, Lucille notes, and as recent history suggests, maintaining spending such as the wage bill and administrative costs flat in real terms is a little too ambitious for the government.
Dev’t to bear the brunt of cuts
“The agency predicts a fiscal deficit of around 7% of GDP based on more modest improvements in tax collection. We expect development spending will bear the brunt of any further cuts to limit the size of the fiscal deficit,” notes Lucille.
Of note is that the budget maintains economic and social policies as well as tax collection measures laid out in the 2018 Draft Budget Policy Statement (BPS), which the agency noted while downgrading the country’s rating.
And even as it lauds the commitment to remove the cap on Kenyan banks’ lending rates – which promises to unlock financing to the productive private sector and boost growth, it will also present risks for the sovereign as Kenyan banks provide substantial funding to the government.
“Owing to this, the modalities for unwinding the measure will be key. We estimate that 25% of Kenyan government debt is held by domestic banks, which is mirrored in the banking sector’s exposure to the government, which represents 30% of the sector asset, concludes Lucille. (
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