Treasury to cut borrowing, spending on shortfall in revenue collection

Treasury Cabinet Secretary Njuguna Ndung'u during a previous press conference at Norfolk Fairmount, in Nairobi. [Edward Kiplimo, Standard]

The government has further revised downwards the amount it plans to borrow over the next financial year citing an expected shortfall in tax revenues that the National Treasury said has necessitated the need to contain borrowing and government spending.

Treasury said it will borrow Sh541.7 billion from both domestic and foreign lenders over the 2024-25 financial year. 

This is significantly lower compared to the Sh703.9 billion that the Treasury had said would be the budget deficit when it published the Budget Policy Statement (BPS) earlier this year. 

Treasury now says challenges that the economy faces have resulted in revising downwards the budget deficit as well as the overall budget spending.

“The National Treasury has reviewed the fiscal deficit for the 2024-25 financial year to Sh514.7 billion (2.9 per cent of GDP) from the earlier projection of Sh703.9 billion (3.9 per cent of GDP) contained in the BPS and the 2024 medium-term debt strategy (MTDS),” said Treasury in the Budget Estimates tabled in Parliament this week. 

“The revisions take into account the challenges experienced in the 2023-24 financial year including revenue shortfalls and liquidity constraints.”

It noted that revenues have been below target and that by the end of March 2024, total revenue was below target by Sh270.7 billion, out of which ordinary revenue had a cumulative shortfall of Sh255.1 billion from the target.

Lower deficit

Treasury has been targeting to collect Sh2.89 trillion as total revenues while ordinary revenues were expected to reach Sh2.45 trillion by June. 

The budget deficit for the next financial year is also lower than the Sh785 billion in the current financial year that ends June 30. As a ratio of the GDP, the deficit for the current year is expected to be 4.9 per cent.

A large chunk of the money is expected to be borrowed locally at Sh257.9 billion while the balance will be borrowed from global lenders.

Kenya’s public debt stood at Sh11.248 trillion as at December last year.

Kenya recently replaced the nominal public debt limit of Sh10 trillion with a debt anchor of GDP in present value terms with a debt to GDP ratio of 55 per cent in present value terms. Treasury expects to hit the 55 per cent ratio in November 2028.

Debt to GDP ratio currently stands at 67 per cent. 

“The rationale is to measure the relative size of the debt in terms of the country’s debt carrying capacity and allow for the period impact of exogenous shocks in debt and GDP,” said Treasury. 

“The present value of overall debt to GDP is projected to decline from the current 67.2 per cent to 55 per cent benchmark over the medium term.”

Treasury noted that while there is a high risk of debt distress due to global shocks that have resulted in an economic slowdown, the country’s public debt and obligations remain sustainable.

“While overall and external ratings for risk of debt distress remain high, Kenya’s debt indicators are expected to improve as fiscal consolidation progresses and exports and output recover from global shocks. The improvement in debt levels is anchored on fiscal consolidation through revenue mobilisation and expenditure reforms,” said Treasury. 

“Sustained fiscal consolidation is expected to stabilise and bring debt to more prudent levels over the medium term while securing resources to support social spending.”

Due to the failure of Kenya Revenue to meet the revenue collection target for the current financial year, the Treasury said it had also revised the government’s spending plans for the 2024/25 financial year. The total budget will be reduced by Sh273.3 billion to Sh3.91 trillion from an earlier Sh4.19 trillion. 

“Following the underperformance of revenues in the 2023-24 financial year, the projected revenues in the approved 2024 BPS have been revised accordingly to reflect this reality on the baseline.

“Further, to remain on course on the path for fiscal consolidation, there is a need to contain borrowing and rationalise expenditures to sustainable levels,” said Treasury.