NAIROBI: The Kenyan government plans to cut spending by 1 per cent of gross domestic product in the next six months as it seeks to rein in its ballooning budget deficit and create “buffers” to counter emerging market turbulence.
East Africa’s largest economy, a net oil importer, has suffered less than many counterparts on the continent — notably South Africa and Nigeria — from tumbling commodity prices and the fallout of China’s faltering economy. Its currency has stabilised this year after falling 11 per cent last year.
But Henry Rotich, finance minister, told the Financial Times he was looking to slash up to Ks60bn ($590m) from the government’s budget for the financial year ending in June when he presents a supplementary budget next month. Kenya’s gross domestic product is about $60bn.
“As we go into the medium term [we need] to create some buffers, some fiscal space because we are now living in a world where there is a lot of vulnerability,” he said, adding that most of the cuts would be in recurrent expenditure. “Development projects where most of the jobs are created will not be heavily affected, apart from those that are delayed.”
Kenya’s decision to cut its budget mirrors that of South Africa, which is also trying to reduce public sector spending. Ghana, with help from the International Monetary Fund, is seeking to reduce its budget deficit.
In contrast, Nigeria has decided to increase spending in a bid to boost growth while leaders in Uganda and Zambia, which both face elections this year, are also lifting government spending. Kenya’s development projects are centred around building a 600km railway from Mombasa on the coast to Nairobi and on to the town of Naivasha, at a total cost of $3.2bn.
Investors would welcome a Ks60bn spending cut, the equivalent of 10 per cent of the government’s recurrent expenditure, analysts say, particularly since the budget deficit has expanded from 2 per cent a decade ago to about 8 per cent now.
“The Kenyan government has had a bit of a spending problem for some time,” said John Ashbourne, Africa economist at Capital Economics in London. “The economy has not accelerated as much as the government expected a few years ago.”
Last October interest rates on government Treasury bills soared from 9 per cent to 23 per cent as investors worried the government was struggling to service its debt. The government secured a syndicated loan, and calmed the markets with help from the central bank, and Treasury bill rates have now returned to 10 per cent.
But Apurva Sanghi, the World Bank’s lead Kenya economist, said Mr Rotich should look to boost revenues by expanding the corporate and individual tax base, rather than cutting spending. “My team estimated that the government loses 2.6 per cent of GDP in terms of forgone revenues because of misaligned tax incentives,” he said. Kenya’s missed its revenue target by almost 10 per cent, or Ks28bn, in the first quarter of this financial year, the state revenue authority said.
Mr Rotich acknowledged that economic growth, which is expected to be around 5.7 per cent in 2015, was at least two percentage points lower than it needed to be to create enough jobs for all those entering the labour market.
