Ruto looks East to seal holes in second budget

National Treasury CS Njuguna Ndungu walks to Parliament to present Budget highlights on June 13, 2024. [Boniface Okendo, Standard]

In a move to bolster economic stability and enhance debt sustainability, the National Treasury has announced a strategic shift in its borrowing approach.

Treasury Cabinet Secretary Njuguna Ndung’u, while presenting the National Budget, emphasised the government’s commitment to reducing reliance on commercial borrowing and exploring a variety of financing options.

The government will diversify financing through Panda, Samurai and Sukuk bond issuances in China, Japan and Gulf markets respectively, prioritising concessional loans, Prof Ndung’u said.

“This multi-pronged approach will bolster debt sustainability and support efforts to upgrade our credit ratings,” he added, citing significant global and domestic headwinds facing the economy.

“Our medium-term debt management strategy aims at lowering the costs and risks in the debt portfolio. In this regard, the Government will slow down the uptake of new external commercial debt and undertake liability management operations through debt swaps and other innovative solutions,” he said.

“The Government will also diversify sources of financing through the issuance of Panda, Samurai and Sukuk bonds in financial markets in China, Japan and the Gulf regions, respectively. The Government will maximise the use of concessional financing from bilateral and multilateral institutions to improve debt sustainability and boost our credit rating position.”

At more than 70 per cent of GDP, Kenya’s debt burden and the near one-third of revenues spent on interest concern investors. Ndung’u has also warned of limited new borrowing capacity as revenues fall short of infrastructure goals.

“Kenya meets its debt obligations promptly and no debt arrears have been accumulated. Public debt is projected to remain within sustainable levels on account of the fiscal consolidation path that reflects a decline in the ratio of debt to GDP in present value terms over the medium term,” he said.

“The Government’s fiscal policy is to enhance fiscal consolidation efforts to reduce debt vulnerabilities and rebuild fiscal buffers amid significant global and domestic challenges. The external and domestic shocks that Kenya has experienced serve as a reminder of the importance of fiscal buffers,” he said.

Analysts said yesterday the new strategy aims to give government more flexibility during economic turbulence, but noted low growth could hamper diverse financing plans.

International institutions like the IMF and World Bank have ramped up Kenya’s support this year.

But Prof Ndung’u has said sustainable debt levels are key to development financing over the long run.

Ruto has been pushing for Kenyans to live within their means to reduce public debt, which crossed the Sh10 trillion mark as of March.

Reduced borrowing

However, while the country is keen to cut back on borrowing, it has continued to tap facilities available at both the World Bank and IMF to sustain its budgetary obligations in the face of reduced tax revenue.

Prof Ndung’u estimated that the government would need to borrow Sh257.9 billion domestically and Sh256.7 billion internationally.

The rest would have to come from taxes but with the Finance Bill 2024 facing stiff challenges, it remains to be seen whether Treasury’s ambitions to raise Sh2.91 trillion in ordinary revenue will be met.

Kenya early this year tapped the international bond market to raise cash and buy back a 10-year Eurobond of $2 billion that matured this month.

The World Bank, while approving a $1.2 billion loan for Kenya, reported that it is planning to carry out another Eurobond buy back this year, which would bring the total amount of debt it has bought back in 2024 to about $2.5 billion.

It said the government would have to be proactive in its liability management and focus on concessional borrowing to reduce its interest costs and amortisation pressure, especially between 2028 and 2031, to forestall future liquidity squeezes.

“To this end, the GoK (government) is considering another Eurobond buyback in 2024, bringing the total 2024 buyback to approximately $2.5 billion, smoothing the amortisation profile.” the report said.

This week, Kenya also reached a staff-level deal with the International Monetary Fund (IMF) that will lead to key policy actions entailing corrective measures to safeguard debt sustainability, including measures underpinning the FY2024/25 budget to reverse the impact of the fiscal slippage in FY2023/24.

The agreement was reached after an IMF team led by IMF Mission Chief to Kenya Haimanot Teferra held discussions with the government in Nairobi on April 2-12 and May 9-15.

A statement from the IMF said the mission continued virtually to finalise key technical aspects of the agreement, including recalibrating access to IMF resources to align more closely with Kenya’s current needs following its access to the international bond markets earlier this year.

On its part the government expects total revenue to hit Sh3.34 trillion, which includes ordinary revenue of Sh2.9 trillion and the balance of Sh440 billion that will be sourced through ministerial appropriation in aid.

This has been deemed as ambitious, with analysis showing that this will almost be a 20 per cent jump in the case of ordinary revenue, which has on average been growing at a rate of 10 per cent annually in the past.

The Ndindi Nyoro chaired Committee on Budget and Appropriations in its report on the budget noted that the performance of the tax collections over the current financial year that ends June 30 is likely to underperform by Sh270 billion.

The Committee added that going by these factors, “it is unlikely that the projected revenue collection for the 2023/24 financial year will be met. Similarly, it is expected that (all things held constant), the ambitious revenue target for the 2024/25 financial year may not be realistic.”

Treasury is counting on a raft of measures to grow taxes, including the proposals in the Finance Bill 2024 and a review of how it goes about tax administration, Prof Ndungu expects the measures contained in the contentious Finance Bill 2024 to yield an additional Sh346 billion and inch close to meeting the target for the next financial year.

Some of the proposed tax measures include a controversial motor vehicle tax that has been set at 2.5 per cent of the value of the vehicle, with a floor of Sh5,000. Another proposed levy is an Eco Levy on certain goods manufactured or imported into the country as a penalty for the negative environmental impact posed by the said goods.

The Eco Levy, which comes into effect On July 1, will affect a wide array of machinery and equipment including office machinery, data processing machines, base stations, and smartphones among others.

Tax measures

“The tax measures proposed in the Finance Bill, 2024 and the said custom measures are expected to generate an additional Sh346.7 billion or 1.9 per cent of GDP to the exchequer for the 2024/25 financial year budget,” he said.

Prof Ndungu said the government’s bid to mobilise tax revenues had in the past experienced major challenges due to inadequacies in the country’s tax policy. These included the nature of Kenya’s economy that is largely informal, which he noted is hard to tax because it is outside the current tax instruments. Other challenges include low compliance and difficulties in taxing the digital economy.

He said to address these inadequacies, the Treasury is implementing a combination of tax policy and administrative reforms.

“The reforms are premised on the need to ensure that taxes are more supportive to economic activity, do not distort markets and have a predictable tax structure,” he said.

Prof Ndungu added that the National Treasury had embarked on a review of the national tax policy. The Treasury has come under heavy criticism for the delay in implementation of the tax policy that has been years in the making. 

[Reporting by Brian Ngugi, Frankline Sunday and Macharia Kamau]