Why Kenya is cutting back borrowing from capital markets

Kenya will reduce its borrowing from capital markets in the next three years to make its repayments schedule more bearable – following criticism of ramping up borrowing since 2013.

Total public debt stands at about 55 per cent of GDP, up from 42 per cent when President Uhuru Kenyatta assumed power in 2013.

The government has defended the higher borrowing, saying it is required to fund infrastructure with the mounting debt load consisting of several Eurobonds issued since 2014 as well as syndicated loans taken out from an array of lenders.

The government will focus on boosting revenue collection in order to cut the need for additional borrowing.

Last month Kenya also said it will reduce its budget deficit to 4.8 per cent of GDP in its 2020/21 (July-June) fiscal year from 5.6 per cent this financial year.

Acting Treasury CS Ukur Yatani said the country would achieve this by cutting unnecessary expenditure, such as trips abroad by officials and advertising by government departments, in an effort to cushion fiscal deficit.

“The cuts will be brutal and will be sustained,” he told a meeting to plan the government’s budget for the next fiscal year, adding that he expected the deficit to drop to 3.5 per cent of GDP by the 2022/23 fiscal year.

In June this year, Kenya set an ambitious target to lower its fiscal deficit to 3 per cent of the Gross Domestic Product (GDP) in the medium term (2022/23) in a bid to reduce public spending and limit borrowing.

The National Assembly Budget and Appropriations Committee had estimated Kenya’s fiscal deficit for the 2019/20 financial year, whose budget is scheduled to be tabled before the House by the suspended National Treasury Cabinet Secretary Henry Rotich, at 5.6 per cent of the country’s GDP.

The 5.6 per cent target for 2019/20 represents a 0.7 per cent decline from the current financial year’s fiscal deficit of 6.3 per cent. National Treasury is hoping to sustain the reforms to attain the 3 per cent mark by the financial year 2022/23.

The ambition to scale down fiscal deficit is part of the country’s effort to improve compliance the regional macroeconomic convergence criterion which requires member countries to attain a fiscal deficit of not more than 3 per cent of respective Gross Domestic Product indices and a headline inflation rate of less than 8 per cent.

The finance ministry has already indicated it is reviewing its 2019/20 (July-June) budget to cut the government’s expenditure and set more realistic revenue collection targets.

Policymakers will embark on a monetary easing stance if the fiscal cuts are sustained to attain a balance, Patrick Njoroge, the central bank governor, said in September.

In 2016, the government capped commercial interest rates at four percentage points above the central bank’s benchmark rate of 9.0 per cent, accusing lenders of failing to offer affordable credit.