Global credit rating agency Fitch Ratings says Kenya’s fiscal deficit is expected to widen to 8.3% of GDP in the fiscal year to June 2021 (FY21) from 7.4% in FY20.
The agency attributes it to the timing of the Covid-19 pandemic shock relative to the fiscal year and election-related spending pressures.
Further, it says the country will find it difficult to tame its rising debt even if it successfully receives IMF’s $2.3 billion (KSh255 billion) because of its uneven track record in implementing fiscal policy.
”Kenya’s government has an inconsistent record on fiscal consolidation and implementation of IMF programmes, and there is a general election in 2022, which will add to political difficulties associated with reining in the deficit,” Fitch said.
“Political pressure for higher budget transfers to counties from the central government could add to the difficulty of curbing expenditure, while the debate around the Building Bridges Initiative and its proposed constitutional changes will detract from public finance reforms.”
National Treasury Cabinet Secretary Ukur Yatani told the Finance and Planning committee of the National Assembly that the country’s public debt had breached the KSh7 trillion mark, about 71.2 percent of the Gross Domestic Product (GDP).
Kenya received US$739 million from the IMF in May 2020 through a Rapid Credit Facility (RCF).
Besides, the government will maintain heavy local borrowing pending debt restructuring and better external conditions according to Faith Atiti and Stephanie Kimani from NCBA Research due to the persistent mismatch in revenues and expenditure.
They note that in the 4 months to October 2020, tax revenue collection declined to Ksh 426.38 billion (down 14.44% y/y) while expenditure remained fairly static at Ksh 664.30 billion (down 3.13% y/y).
“The extraordinary lull in revenues has been linked to weakness in the economy and foregone revenues from the various tax relief measures enacted to cushion households and businesses. The National Treasury estimates that the said measures have denied the government Ksh 65.00 billion so far this fiscal year,” they note.
To plug the gap, the government has capitalized on sound liquidity in the domestic market.
Consequently, the government has resolved to faze off the aforementioned tax relief measures in January 2021 in a bid to help reduce the deficit and need for debt. While this may be premature, the redistribution of the revenues may result in a greater public good.
“We expect that Kenya will not face significant difficulties obtaining funding. Financing plans for the FY21 budget originally included Eurobond issuance sometime in 2020, but these plans were scrapped in the face of the pandemic. In addition to the IMF’s RCF, the National Treasury has increased domestic debt issuance to help finance the FY21 fiscal deficit,” says Fitch.
The rating firm says, if a loan agreement with the IMF is secured and implemented, it could ease Kenya’s financing burden by providing access to relatively cheap funding.
It could also provide reassurance to private-sector investors, enabling Kenya to issue debt on cheaper terms.