Kenya National Treasury has said it will explore domestic and foreign funding options for planned borrowing of an estimated Ksh 115.15 billion deficit while also redeeming Ksh 210.31 billion in maturing debt within the next two months.
According to NCBA Research Team, Faith Atiti and Stephanie Kimani, Treasury has proposed to scale up domestic borrowing to Ksh 389.70 billion in the current fiscal year from Ksh 300.30 billion so far.
Treasury has borrowed Ksh 274.55 billion from local markets.
They note that massive demand and supply shocks resulting from the coronavirus pandemic has necessitated large scale fiscal expansion “The implications for revenue growth from the above projections in economic activity is dire. This will be compounded by the recent tax incentive which at best will just minimize pain for consumers and investors without necessarily sustaining or increasing productivity levels,” they wrote in their NCBA Weekly Fixed Income Report – 15th April 2020.
Data from Treasury’s supplementary budget tabled in Parliament on Wednesday says it generated KSh1.3 trillion as revenue against a target of KSh1.5 trillion.
“The total cumulative expenditure and net lending, inclusive of transfer to county governments, for the period ending March 29 amounted to KSh1.8 trillion against a target of KSh2 trillion. The shortfall of KSh 216.1 billion was attributed to under-absorption in both recurrent and development expenditures by the national and county governments.”
Within the budget, Treasury proposes a Kshs 9.7 billion decline in the gross total supplementary budget to Kshs 2,803.1 billion from Kshs 2,812.8 billion.
“This is still a 2.5 per cent rise from the initial approved budget. The proposed budget rationalization is attributable to the tough economic environment brought about by the pandemic and inability of the government to raise funding through tax revenues in order to meet its domestic borrowing target,” Analysts at Cytonn observe.
“We expect the fiscal deficit to expand during the tail end of the fiscal year, attributable to revenue underperformance, which has seen the Government increase its borrowing target. We maintain our view, that with only 2 months left to the end of the current fiscal year, the Government’s fiscal consolidation plan will remain elusive,” they add.
Churchill Ogutu, Head of Research at Genghis Capital further says the overall budget reduction is ‘hardly a contractionary fiscal policy in light of revenue underperformance coupled with the COVID-19 shock.”
So far, Treasury is 33.4 percent behind its current domestic borrowing target of 404.4 billion, having borrowed Kshs 222.8 billion against a prorated target of Kshs 334.4 billion.
“A budget deficit is likely to result from the depressed revenue collection with the revenue target for FY’2019/2020 at Kshs 2.1 trillion, creating uncertainty in the interest rate environment as additional borrowing from the domestic market goes to plug the deficit,” says Cytonn.
NCBA Research Team also adds that “Increased debt appetite coupled with risks posed by a wider deficit should invite some premium on the sovereign.”
Ogutu further says with the Tax Laws (Amendment) Bill 2020 in its current form, treasury will be seeking to offset the tax losses with other taxation measures.
“As this particular Bill is expected to be debated next Wednesday, we expect the National Assembly’s Finance and Planning Committee to raise far-reaching amendments which could derail revenue mobilization and ultimately, the realism of FY2019/20 Supplementary Budget II Estimates,” says Ogutu.