Rising Inflation, Crude Oil New Worry for Kenya’s Fiscal Health – Analysts

The prices are inclusive of the 8 per cent Value Added Tax in line with the provisions of the Fiance Act 2018

The steady rise in crude oil prices is the latest worry for Kenya’s fiscal health according to financial markets analysts.

This is besides the current inflation remains well within the central bank’s target at 5.69% in January.

According to NCBA Research Team, Faith Atiti and Stephanie Kimani, crude oil has made a comeback rising above $60 a barrel for the first time in more than a year.

Oil has risen by close to 13% on a year-on-year basis. 

The team says the rise was a tightening of stockpiles and improving demand outlook, especially from China.

“For Kenya, the increase in prices may raise inflation expectations, limiting the ability of the central bank to support economic recovery. The impact directly through pricing and potential currency adjustments could see inflation rise towards the upper limit of the inflation target although the risk of a breach remains low to moderate,” NCBA team writes in their Weekly Fixed Income Report.

They also add that the rise in expectations could ‘add some pressure’ on interest rates already under moderate pressure from a high fiscal deficit and the reliance on local capital markets for the bulk of deficit financing.

Currently, the government has borrowed Ksh 321.96 billion from the local market, just about 56% of the target for this year.

Cytonn Investments says the government will record a shortfall in revenue collection with the target having been set at Kshs 1.9 trillion for FY’2020/2021, thus leading to a larger budget deficit than the projected 7.5% of GDP.

This is being attributed to the current subdued economic performance brought about by the effects of the COVID-19 pandemic.

“Ultimately creating uncertainty in the interest rate environment as additional borrowing from the domestic market may be required to plug the deficit,” they note.

However, the Kenya Revenue Authority on Monday said it had surpassed its collection target in January amid Covid-19 hurdles, signalling economic recovery.

In the month, KRA collected KSh142 billion against a target of KSh138 billion, 6.7 per cent growth.  In December, KSh166 billion against KSh164 billion target.