607.8 Billion Budget Deficit to Be Financed by Local and Foreign Borrowing

The National Treasury has revealed that it will have to raise an additional 607 billion shillings which is going to seal the budget gap for the financial year 2019/2020.

Figures indicate that the budget deficit amount has gone up by 31 billion shillings from the 576-billion-shilling budget deficit in 2018/2019.

According to reliable data from the parliamentary budget office, 324 billion shillings will be raised from foreign borrowing while 283 billion shillings will be raised from local borrowing.

This means that the public debt mix is changing to comprise 53 percent foreign debt and 47 percent domestic debt, compared to 47 percent foreign debt and 53 percent domestic debt as per the revised FY 2018/2019 budget.

This structure does not match the 2019 Medium Term Debt Strategy Paper which recommended that domestic debt be the main source of financing.

The proposed debt financing could, therefore, carry fiscal risks and costs which were not anticipated under the 2019 Medium Term Debt Strategy which had considered the trade-offs between costs and risk outcomes.

This could be aggravated by the fact that the actual fiscal deficit is likely to be higher than the estimated amount.

On the plus side, however, the lower domestic debt could reduce the effects crowding out of the private sector due to the government’s local debt appetite, with banks being the main participants in government securities, contributing about 50 percent in every auction.

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