Treasury must tame new loans appetite
As Kenya’s fiscal deficit continues to grow close to Sh1 trillion, Treasury mandarins are getting more creative and are in the market with new bonds to fuel the country’s ambitious Sh3.6 trillion budget.
For leverage, Treasury plans to diversify its sources by maintaining a presence in the domestic and international capital markets as revenue sources dwindle.
Treasury projects to net Sh2 trillion in taxes and levies such as fines and fees, while ordinary revenue, which is basically taxes, is estimated at Sh1.77 trillion.
On the other hand, recurrent expenditure will gobble up Sh2 trillion while development will take up Sh624.5 billion, as counties get Sh370 billion as part of equitable share.
Treasury’s rhetoric in the recent past has been maximising on concessional loans for external borrowing, while limiting non-concessional, commercial loans and sovereign bond issuing to projects with high financial and economic returns.
As options grow thinner, Treasury says it will be in the market for new sources of funds including Islamic financing instruments, green bonds and diaspora bonds over the medium term to get funds to run the economy.
In the proposed 2021/22 budget, National Treasury projects a deficit of Sh952.9 billion (7.7 per cent of GDP) up from a deficit of Sh840.6 billion (7.5 per cent of GDP) in the financial year 2020/21.
This means Kenya’s fiscal deficit is expected to increase by Sh112. 3 billion in the 2021/22 financial year set to begin in July at a time experts are calling for a reduced budget deficit as the best alternative to address the ballooning public debt burden facing the country.
Experts want the government to reduce the fiscal deficit, saying it was the surest way to tame public debt which stood at Sh7.3 trillion as at March 2021.
This can only be achieved by cutting expenditure which would also reduce the budget deficit, hence the government wouldn’t need to borrow as much.
Indeed, being in the market for more loans at this time is counterproductive.
To finance the fiscal deficit will mean tapping local and external markets for funds but with local borrowing forming the larger portion of the deficit.
This will mean crowding the local market for revenue, hampering efforts by local businesses seeking to recover from effects of the Covid-19 pandemic as banks will be less enthusiastic to lend them, preferring to transact with government.
More importantly, as the appetite for debt rises, what if Kenya froze non-essential spending and considered austerity measures, coupled with tougher actions against corruption?
Maybe this would save an estimated Sh2 billion a day, according to the President, and save Sh700 billion per annum.