2015 will see Jubilee borrowing more

Kenya’s economy was rebased in 2014, a move that saw the country graduate to middle income status and become the ninth largest economy on the continent.

Updating the national accounts put the GDP figures for 2013 at Sh4.75 trillion, about 25 per cent higher than the earlier estimate of Sh3.8 trillion.

It is on the backdrop of the changed wealth status that the Treasury sought and obtained parliamentary approval to increase the country’s borrowing limit from Sh1.2 trillion to Sh2.5 trillion. 

According to the Treasury, the money to be raised from external sources will finance the Sh327 billion standard gauge railway, the10,000 kilometre road annuity programme and the 5,000 megawatt electricity project.

Experts thus foresee government being active in the debt market in 2015 as the Jubilee administration also seeks to fund the Lamu Port and South Sudan-Ethiopia Transport (Lapsset) corridor and irrigation projects among others in its manifesto.

“After rebasing of the economy, Cabinet Secretary Henry Rotich actually sought to rebase the country’s borrowing limit to be in line with our changed status,” Economist Kariithi Murimi told Sunday Nation.

While the Treasury has its own set control mechanism to ensure government does not over borrow, Mr Murimi said that thinning revenues due to falling major exports and below par performance by the Kenya Revenue Authority (KRA) could pose a challenge.

In 2014, Kenya has witnessed lower income from the country’s key exports such as tea, coffee and horticulture, coupled with a decline in tourism earnings due to rise in insecurity.

KRA on the other hand missed the first quarter revenue collection target by Sh17 billion yet the National Treasury has pinned its hopes on the taxman to collect enough to finance the government’s budgetary plans.

“The issue with revenue collection, I believe, has to do with too many loopholes. KRA could be losing a lot through leakages while it battles to grow the tax base,” said Mr Murimi.

REVOLUTIONALISE KRA

The taxman has been implementing various technological-based approaches to enhance tax compliance, chief among them the iTax that seeks to revolutionise the domestic tax department.

With the government, having re-introduced Capital Gains Tax expected to take effect in January, the taxman anticipates at least Sh7 billion in the first six months of 2015.

“The pressure for additional funding is mounting from both county and national government and this may push the Treasury to overstretch public borrowing,” Equitorial Commercial Bank head of treasury Bernard Omenda said.

Upon rebasing, Kenya’s external debt fell to about 46 per cent of GDP having stood at 50 per cent prior to rebasing.

Analysts have previously held that a debt rate rising above 45 or 50 per cent of Gross Domestic Output would put more pressure on the government to rein in expenditure.

Central Bank of Kenya has, however, maintained that such a debt ratio is sustainable since most of it is supporting transport and other projects that will fuel growth in the long run.

According to the Treasury figures, as of September 2014, the government total external debt stood at Sh1 trillion against the previous statutory ceiling of Sh1.2 trillion.

But it won’t be lost to observers that the Treasury has since greatly lowered its domestic borrowing target by Sh68 billion following the successful tapping of the sovereign bond.

Mr Rotich said earlier in the month that the government had reduced the cash to be borrowed through Treasury bills and bonds to Sh120 billion from Sh190 billion.

According to analysts, increased participation of the government in the local debt market has the adverse effect of crowding out the private sector and pushing up interest rates.

A fall in government participation in the domestic debt market leaves commercial banks – who mainly buy the Treasury bills and bonds – with little option but to shift their lending to the private sector at lower rates.

This is because the Treasury bill rate is one of the components used to calculate the recently introduced Kenya Banks Reference Rate (KBRR), which is the standard base lending rate for banks, therefore, the higher the T-bill rate, the higher the interest rate.