Yatani's budget could be smaller than last year's

After months of talking about austerity measures, the new Treasury Cabinet Secretary has moved to demonstrate that his bite is as bad as his bark.

Shortly after being confirmed the head of the Exchequer, Ukur Yatani has come up with a Budget document that shows that, for the first time, the country might spend less in the next financial year that it projects to in the current one.

This is a major milestone for the Treasury’s fiscal consolidation plans, as it seeks to narrow the gap between the amount of money it spends and the cash it collects in taxes - the fiscal deficit.

In the Draft Budget Policy Statement (BPS) for the financial year July 2020 to June 2021 released yesterday, the Treasury plans to spend Sh2.74 trillion, a decrease from the Sh2.87 trillion it plans to spend in the current financial year.

The Treasury has, as of December 2019, spent Sh1.14 trillion.

Mr Yatani said he is hell-bent on reducing the debt uptake, noting that going forward, ministries, departments and State agencies will have to cut their clothes according to their sizes.

Sustainable levels

In the draft BPS, Yatani says this will ensure the debt is maintained within sustainable levels.

As a share of national output, or the gross domestic product (GDP), it is projected that the fiscal deficit will decline from 7.7 per cent in the 2018-19 financial year to 3.3 per cent by 2023-24.

“To achieve this target, the government will continue to restrict growth in recurrent spending and double its effort in domestic resource mobilisation,” reads part of the Budget statement.

The fiscal deficit has been narrowed by Sh88 billion, with the Treasury estimating that it will borrow Sh569.4 billion in the next financial year. This is down from Sh657.4 billion that the country expects to borrow from both external and domestic investors by end of June this year.

Net foreign borrowing is estimated at Sh247.3 billion down from Sh353.5 billion.

However, domestic borrowing is expected to go up, with the government expected to borrow Sh318.7 billion in the next financial year compared to Sh300.7 billion that it expects to borrow from the local market in the current financial year.

As part of his plan to avoid the risks that come with external loans, including exchange rate risks, Yatani seems to be moving towards the local debt market.

The latest data from the Central Bank of Kenya (CBK) shows that the government has increased its appetite for domestic debt.

This, analysts have warned, is likely to have the effect of crowding out the private sector, particularly small and medium enterprises, from the credit market.

Kenya’s total loans climbed back to Sh6.02 trillion after the government added Sh60.7 billion to its stock of debt in November 2019.

This means that in the first four months of the current financial year ending June 30, 2020, the debt jumped by Sh220 billion as the Treasury borrowed more than it repaid.

In the same period in 2018, public debt and guaranteed loans increased by Sh151.4 billion.

But it was the share of domestic debt that grew the fastest during this period. Debt from local investors –banks, insurance firms, pension schemes and individuals – increased by Sh115.5 billion between July and October 2019.

Unfortunately, the Treasury boss’ Budget trimming measures might come at the expense of development expenditure.

Expenditure on capital-generating projects such as roads, bridges, ports and power networks will reduce by 21 per cent, with the government pumping about Sh567 billion into development activities.

This is a significant drop from the Sh730.8 billion that the government expects to spend on development in the current financial year.

The government has been undertaking a raft of austerity measures, including freezing all new development projects until ongoing ones are completed.

State corporations also have to consult their line ministries and the Treasury before recruiting new staff and acquiring ICT-related software, hardware or equipment and installations, according to a new circular Yatani issued.

“State corporations should, as a matter of priority, enhance cost control measures with the aim of delivering services in the most cost-effective manner. Chief executives of State corporations are reminded that incurring expenditures that are not approved by their parent ministry and the National Treasury and Planning is irregular and they will be held personally liable for such expenditures in accordance with provisions of the Public Finance Management Act, 2012,” said the CS.

Increasing fiscal constraints in concessional financial sources, as well as Kenya’s graduation to a lower middle-income economy, said Yatani in the draft BPS, has led to a slowdown in accessing concessional funding. Concessional funding is typically extended to vulnerable economies as it offers more favourable terms than market loans.

“The cost of deficits financing and refinancing maturing debt has, therefore, remained higher since 2014 than in the previous years.”

As a result, he said, the debt service burden will greatly benefit from fiscal consolidation, which will ensure the relative debt service is brought down in the medium term.

“It is also expected that the country will restructure its debt portfolio by replacing expensive commercial debt with cheaper funds from alternative sources.”

Further, ordinary revenues grew by 18.8 per cent in December 2019 compared to 10 per cent in December 2018, driven by strong growth in excise and income tax.

dakure@standardmedia.co.ke