State to borrow heavily from domestic market

June 15, 2012
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Already, current domestic borrowing stands at Sh278 billion that will stretch the debt limit further/FILE
NAIROBI, Kenya, Jun 15 – The government will have to go to the domestic market to finance the colossal Sh1.4 trillion 2012/13 Budget.

The Kenya Revenue Authority’s (KRA) ordinary revenue of Sh870.5 billion is being threatened by a Sh25 billion shortfall from the previous fiscal year.

With at least 81 percent of expenditure expected to be funded by taxes and borrowing, PKF Eastern Africa CEO Atul Shah said Treasury Bills and other government paper will be where government will source from.

“It’s going to be quite challenging if the economy doesn’t pick up. We will rely more on borrowings and go back to the bond markets or infrastructure bonds for development expenditure. If we don’t raise those revenues certain expenditures are not going to occur,” he said.

Already, current domestic borrowing stands at Sh278 billion that will stretch the debt limit further.

This year’s budget jumped by 25 percent from last year’s, with recurrent expenditure expected to eat up all tax revenues in this fiscal year, a trend that has persisted for the last three years.

“A lot of the taxes are going to be spent towards direct recurrent expenditures that means they are not going to towards development. A big portion of these recurrent expenditures are salaries so they don’t generate additional economic activity other than consumer spending,” Shah said.

Recurrent expenditure in this year’s budget stands at Sh1 trillion compared to Sh451 billion for development.

The government’s attempt to tap into new taxable areas, such as roping landlords into the tax net, will continue as it aims to reform the current tax regime to generate more revenue.

“Landlords have always been savvy to tax; it’s only that there was no effective mechanism to ensure that all of them were paying tax. Now, KRA can enforce compliance that means their (landlords’) net income goes down and they may want to compensate themselves by hiking rents,” PKF Eastern Africa Regional Director for Tax Martin Kisuu said.

On Thursday, Finance Minister Njeru Githae did not propose any far-reaching tax measures, despite the fact that government will be looking to get a sizable proportion of its income from tax collection.

“I am of the opinion that the Finance Minister should actually be a lot bolder and cut tax rates in order to incentivise better tax collection,” Rich Management CEO Aly Khan Satchu said.

In its Budget analysis PricewaterhouseCooper highlighted other road blocks to revenue collection like the issue of collecting Appropriation s in Aid revenue by government ministries and departments and the low absorption of donor funds due to procurement and capacity constraints.

Furthermore, the government’s reliance on economic growth is a gamble, and could be undermined by high interest rates and volatile exchange rates, further constraining credit and negatively impacting growth.

Ultimately, Shah warned that the government must be cognisant of its spiralling spending as it is staring at a Sh1.3 trillion outstanding debt impacted by the devolution process, upcoming elections and maintenance of ministries in the coming year.

“The volume of debt is planned to increase. This budget is predicting debt to be approximately 50 percent of GDP. That ratio over the next few years is expected to go down to about 40 percent, but in the next four to five years the debt levels are going to shoot up to about Sh2 billion,” he said.

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