Kenyan Market Awaits FY2020/21 Budget Reading for Play on Fiscal Policy

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For developing economies, the direct and indirect consequences of COVID-19 have not only created twin demand-supply shocks but as well significantly reduced tourism, remittance and capital inflows. 

Unlike most advanced economies, mitigating the economic consequences of the pandemic has placed authorities under immense pressure.

While the Central Bank of Kenya (CBK) may have scope to further ease policy given prospects of lower inflation and a widening output gap, the banking sectors’ need to enhance capital buffers at this time of uncertainty and arising credit risk premia could constrain an effective pass through.

This may explain the monetary authority’s hesitation to augment the central bank rate (CBR) from 7.00% during the May policy-setting meeting.

Focus now shifts to the government to cushion the population. However, there remains a difficulty in financing the COVID-19 response.

Amid revenue weaknesses and rising spending needs, the fiscal authority has sought financing from a variety of sources including reprioritization within the current budget.

However, this has not been a sufficient cover for revenue gaps. The fiscal deficit is expected to widen into double-digit territory in the FY 2020/21 from the National Treasury’s projected 4.90% for the cycle.

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In view of prohibitive international borrowing costs, preference for local debt financing to plug the revenue gap is likely to place pressure on the yield curve.

However, risks of crowding out the private sector could see the government shift to more concessional financing from its development partners in a bid to manage its debt obligations.

As markets await the budget reading on 11th June 2020, the government is likely to affirm its commitment to not only supporting the economy, more so vulnerable groups but as well develop effective mechanisms that promote fiscal sustainability.

The success of these mechanisms is what remains to be seen making the future of fiscal policy that more precarious.

NCBA Research (Email: NCBA.Research@ncbagroup.com)