Bloomberg News

Kenya Raises Spending in Election Year, Undermining Targets

June 13, 2012

Kenyan Finance Minister Robinson Githae is ramping up spending to prepare for elections that were marred by violence more than four years ago, undermining plans to curb the budget deficit and adding to borrowing costs in East Africa’s largest economy.

Githae, who will give his budget speech at about 3 p.m. tomorrow in the capital, Nairobi, may increase expenditure by 25 percent to 1.5 trillion shillings ($17.7 billion) in the fiscal year ending June 30, 2013, according to estimates from the Finance Ministry. Uganda, Tanzania and Rwanda, who make up the East Africa Community with Kenya, are also scheduled to publish budget estimates. The fifth member of the EAC, Burundi, announced its 2012 spending plans in December.

East African governments, which earn most of their foreign currency from commodity exports, including tea and coffee, are struggling to support their economies and keep inflation under control after last year’s drought. Kenya may battle to meet its goal of trimming the budget deficit to 4.3 percent of gross domestic product next year as it boosts spending on security and creates a second-tier of government ahead of elections.

“It will be a challenge for Kenya to reduce the budget deficit, given that 1.5 trillion shillings is a big increase in the budget and revenue collection isn’t keeping pace,” Nikhil Hira, a partner with Deloitte LLP’s East Africa unit, said by phone from Nairobi. “The election is a budget priority with beefed up security to make sure things go smoothly.”

Rising Yields

The yield on Kenya’s three-month Treasury bill rose for the first time in almost five months, increasing to 9.801 percent at an auction on June 7 from 9.336 percent the previous week. That was the first advance since Jan. 19, according to data on the central bank’s website.

Kenya is spending more on technology to avoid voter fraud, creating a Supreme Court, and setting up a Senate and 47 county- level governments that will handle at least 15 percent of revenue. Allegations of vote-rigging after the last poll in 2007 sparked two months of ethnic violence, in which at least 1,100 people died.

“Increased spending means bigger budget deficits, and in our view they will have to be financed primarily with domestic borrowing, pushing up yields,” Yvonne Mhango, a pan-African economist at Renaissance Capital in Johannesburg, said in a phone interview.

Fiscal Pressures

That may make it difficult for Githae to curb the budget deficit to 4.3 percent of gross domestic product next year from an estimated 6.9 percent in the 12 months ending June 30. Revenue from taxes and grants is projected to climb 34 percent to 954.6 billion shillings next year, according to budget estimates tabled in Parliament on April 26.

Adding to fiscal pressures, Kenya is also financing a military operation in neighboring Somalia to fight al-Shabaab militants. The government plans to raise 106.7 billion shillings in domestic markets and 143.6 billion from international sources, according to the budget documents.

Uganda, which plans to start pumping its first crude oil this year, may lift spending by 10 percent to 10.23 trillion Ugandan shillings ($4.1 billion) in the year through June 30, 2013, according to Finance Ministry estimates in March. Building the planned 600-megawatt Karuma hydropower plant along the Nile River in the northwest is a budget priority, the ministry said.

Rwanda’s budget is set to increase by 15 percent to 1.4 trillion francs ($2.3 billion), with 26 percent of that set aside for projects, including electricity and transport investments, the Kigali-based Rwanda Focus, a weekly newspaper, reported on June 11, citing a presentation of estimates by Finance Minister John Rwangombwa.

In Tanzania, the Finance Ministry has proposed a 15 trillion-shilling ($9.4 billion) spending plan for the next fiscal year, 17 percent more than this year. Expenditure will be focused on areas including infrastructure, agriculture and defense, Zitto Kabwe, a spokesman for finance at the opposition party, Chadema, said on June 12.

To contact the reporter 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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