Bloomberg News

Kenya Raises Budget Gap Forecast for 2011-12 on Higher Spending

June 08, 2011

June 8 (Bloomberg) -- Kenya’s government raised its budget deficit forecast for the fiscal year through June 2012 as it stepped up investment to improve infrastructure and enact a new constitution, Finance Minister Uhuru Kenyatta said.

The fiscal deficit will widen to 184.3 billion shillings ($2.1 billion), Kenyatta said in his budget speech aired by the state-run Kenya Broadcasting Corp. Excluding the rollover in domestic debt and taking into account external debt redemptions, the deficit will widen to 236.2 billion shillings, or 7.4 percent of gross domestic product, he said.

“The deficit is going up because this is a very expansionary budget,” Elizabeth Irungu, investment manager at Stanbic Investment Management Services, said by phone from Nairobi. “The interest rate environment may remain a bit high, and this could squeeze the private sector a bit.”

The budget deficit has expanded every year since at least 2005, the International Monetary Fund said in April, partly due to stimulus spending during the global financial crisis and poor tax revenue. Faster inflation and the persistent fiscal deficits have pushed up yields on government debt that represent 47.1 percent of gross domestic product, according to the IMF.

Three-month borrowing costs in Kenya, which rose to a nine- year high of 8.8 percent at the last auction on June 2, may climb higher, Kennedy Butiko, deputy head of treasury at Nairobi-based Bank of Africa, said on June 3.

Food Costs

Kenyatta estimated in March the budget deficit would narrow to 152.6 billion shillings, or 5 percent of GDP, in 2011-2012, from 162.5 billion shillings, or 6 percent of GDP, this year, pointing to growth in the economy and improved revenue from value-added tax.

Kenya’s inflation rate rose to a 25-month high of 13 percent in May, and the central bank predicts crop losses from dry weather may push up the rate again later this year.

Kenyatta reiterated that he will remove the excise duty on kerosene, a fuel used for cooking, following a 30 percent reduction in April. The duty on wheat imports will also be eliminated for one year, while the tariff on corn falls to 10 percent from 50 percent for six months to cushion Kenyans from the rising costs, he said.

Investment of 10.2 billion shillings to expand irrigation systems will help improve crop yields in the future, boosting domestic food supplies and transforming Kenya into a net exporter of crops, Kenyatta said.

Investment

Kenya plans to borrow 119.5 billion shillings on the local debt market in 2011-2012, compared with an estimated 125 billion shillings this fiscal year, as expenditure increases 15 percent to 1.15 billion shillings, Kenyatta said. Spending is forecast at 998.3 billion shillings in the current fiscal year, Planning Minister Wycliffe Oparanya said on May 17.

Fiscal revenue will grow 15 percent to 787.6 billion shillings in 2011-12, Kenyatta said.

Following two consecutive years of accelerating economic growth, the World Bank forecasts expansion of 4.8 percent this year, compared with 5.6 percent in 2010. Kenyatta today forecast growth of 5.3 percent this year and 6.1 percent next.

Kenya is trying to implement changes required in a constitution promulgated in August, such as creating a Supreme Court and Senate and setting up 47 county-level governments before elections in 2012. The government will spend 20.8 billion shillings to enact the new charter, Kenyatta said.

Kenya’s economy was battered by ethnic violence following a disputed presidential election in 2007 that left 1,500 people dead and drove another 300,000 from their homes.

“Our fiscal policy aims at gradually lowering our fiscal deficit in order to ensure debt sustainability, while at the same time taking care of the long-term development needs of the country as well as implementation of the constitution,” Kenyatta said.

--Editors: Philip Sanders, Karl Maier

To contact the reporters on this story: Sarah McGregor in Nairobi at smcgregor5@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.


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