Kenya will raise its borrowing from the domestic market for the fiscal year from July to KSh 294.6 billion from its initial target of KSh 236. 1 billion according to Treasury’s 4th 2016 Budget Review and Outlook Paper (BROP).
Cytonn Investments note that,” Due to the reduced foreign borrowing, the public debt to GDP ratio is set to decline by 170 bps to 47.4% from 49.1% expressing external debt sustainability and low risk towards external debt distress.”
Currently, the Government is ahead of its domestic borrowing for this fiscal year having borrowed Kshs 116.1 billion for the current fiscal year against a target of Kshs 83.9 billion.
“Interest rates, which had reversed trends due to the enactment of The Banking Act Amendment, 2015, appear to have bottomed out and we expect them to persist at the current levels. It is due to this that we think it is prudent for investors to be biased towards medium-term papers,” Cytonn Cautions.
Read: Times Ahead if Ever Increasing National Debt is not Tamed, Warns World Bank
On enhancing efficiency and effectiveness as per the Medium-Term Fiscal Framework to strengthen resilience to risks present in the economy and support sustained growth, the government strategies include:
- maintaining prudent fiscal standards in line with the medium-term debt targets,
- scaling up infrastructure investment in transport, irrigation and alternative sources of energy,
- strengthening capacity-building in public financial management, (iv) enhancing the governments cash management system to avoid undue pressure on payment flows, and
- effective management of natural resources including recently discovered oil.
Key highlights of the 2016 Budget Review and Outlook Paper (BROP) as analysed by Cytonn Investment are:
- The total revenue has been revised downward by 2.9% from Kshs 1.50 tn from Kshs 1.45 tn accounting for 20.1% of GDP compared to previous 20.7%. Tax revenues estimates were revised downwards by 4.4% to Kshs 1.2 tn from Kshs 1.3 tn. In our view, government needs to find ways of widening the tax base to increase revenue collection, and is making headway with this through the i-Tax system,
- The total expenditure is set to decline by 8.9% to account for 28.6% of the GDP, from 31.3% previously, mainly driven by a 26.5% decline in development expenditure while the recurrent expenditure is set to increase marginally by 1.3%. This is a negative for the economy, with expenditure geared away from development activities, which will drive GDP growth, towards recurrent expenditures, which are showing no signs of efficiency. Key to note is that the reduction in development expenditure is also due to low absorption of 71.6% in the last fiscal year,
- Foreign borrowing is set to go down significantly by 37.8% to Kshs 287.6 bn from Kshs 462.3 bn as the domestic borrowing increases by 24.8% to Kshs 294.6 bn from Kshs 236.1 bn and this can be attributed to the interest rates cap which has driven the interest rates down offering the government cheap source of funds from the commercial banks. In as much as this will reduce our exposure to foreign currency obligations, large increases in domestic borrowing may lead to crowding-out of the private sector from accessing credit,
- Wages and salaries as a percentage of National Government Revenues are projected to rise by 1.1% to 30.8% from 29.7%. In the last fiscal year, the absorption rate for wages and salaries was less by Kshs 26.1 bn of the target,
- Budget deficit exclusive of grants is however, set to decline by 20.3% to Kshs 617.8 bn from Kshs 775.1 bn accounting for 8.1% of the GDP from 9.7% previously. This is a positive for the economy and shows Kenya is pushing towards being compliant with IMF measures for the stand-by facility, to curb down the budget deficit to 6.0% in the medium-term.