Experts fears over inflation

June 13, 2009
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, NAIROBI, Kenya, Jun 13 – Financial experts have cautioned that the country’s macroeconomic stability might be affected in the coming months if the government fails to raise funds to bridge the budget deficit.

Atul Shah, a partner with PFK Kenya, says if the level of borrowing from the domestic market is more than the projected Sh109 billion, then interest rates and inflationary pressures might rise.

“Government expects to raise more tax revenues against a background where they did not meet last year’s revenue targets by Sh10 billion. At the same time, it has not really controlled its own expenditure so the situation is actually quite stressful and there’s a significant danger that the economic macro stability factors will change drastically,” he warned.

At a post-budget seminar on Friday, he predicted that should the interest rates go up, then these would be challenging times for the private sector as they would have problems accessing cheaper credit.

Already, banks are said to be exercising caution while lending as they prepare for difficult times ahead. Interest rates are surging and are currently at 15 percent. However, people who are seeking loans say the rates are hovering at between 16 and 17 percent.

Although he applauded Finance Minister Uhuru Kenyatta’s budget speech as a ‘people’s budget’ as it proposed a few cut back measures, Mr Shah said there needed to be a consolidated expenditure rationalisation approach.

Limiting cars used by ministers to those with an 1800cc capacity and cutting back on government advertising budget were welcomed, but he wondered whether they would be implemented.

Pointing to the legislators’ refusal to have their allowances taxed Mr Shah expressed doubt that these cost cutting measures would be executed.

If, however, the government strengthened the governance aspects of public service, tighten procurement measures and instil ethical behaviour, then these goals would be achieved.

He also faulted the minister for reducing allocations to the tourism sector arguing that more money is needed to market Kenya as a prime tourist destination particularly as the grappling with the after-effects of the post election violence and travel advisories.

Issues of constitutional review such as a mention of a defined time frame for completion and those of the signing of the East African Community Treaty were left out.

While the decision to channel more money through the Constituency Development Fund was laudable, the tax expert said accountability of the funds was critical so that the funds achieve their intended purpose.

“Proper accounting administrative controls have to be instituted to protect the same from being misused or abused,” he suggested.

At the same time, he said for the economy to grow, the development expenditure should be progressively doubled to about 60 percent. Of the total government expenditure of Sh866 billion, only Sh258 billion was allocated to development programs.

Mr Shah added that the government needs to put in place measures that will increase the disposable incomes and purchasing power for the masses. This, he explained would have the multiplier effect of increasing production and improving the quality of life for all.

When this is done, then the country is likely to see the success of the Medium Term of the Vision 2030 and thus the dream of achieving a seven to 10 percent GDP growth would be attainable, he concluded.

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