Bloomberg says county spend cuts unlikely as polls near

Money Markets

International Monetary Fund first deputy managing director David Lipton. PHOTO | FILE 

By GEOFFREY IRUNGU, girungu@ke.nationmedia.com

In Summary

• Bloomberg Intelligence cites political expediency as reason why debt cut plan may fail.
• Kenya has already agreed with the IMF to bring the fiscal deficit down to about five per cent by the end of 2017 from the current eight per cent.

Political considerations ahead of next year’s General Election may make it impossible to effect cuts in public spending in the counties, a new report by Bloomberg Intelligence says.

Kenya has already agreed with the International Monetary Fund (IMF) to bring the fiscal deficit down to about five per cent by the end of 2017 from the current eight per cent.

The counties have however been asking for more cash and some are borrowing without the approval of the National Treasury. The polls are scheduled for August 2017.

“Elections in August 2017 may make it politically expedient to delay a needed curtailment of county-level spending, which would have repercussions for Kenya’s already elevated public-debt level,” said Mark Bohlund, an economist responsible for Africa and Middle East with Bloomberg Intelligence.

Kenya’s public debt is currently at 52 per cent of the gross domestic product (GDP) having risen in the past few years because of the Sh280 billion ($2.8 billion) sovereign bond and the Sh251 billion in the domestic borrowing for 2014/15 fiscal year.

Mr Bohlund noted Kenya has some of the highest public debt levels among large sub-Saharan African countries, mainly because it does not sell any of the major world commodities.

“Kenya has one of the highest public debt levels among large sub-Saharan African economies. This is partly a vestige of it having neither the commodity revenue sources of Nigeria and Angola nor the budget support from donor countries enjoyed by neighbouring Tanzania and Uganda,” said Mr Bohlund said.

READ: State’s debt appetite in focus as payments take up half of taxes

However, the Kenyan government and its multilateral lenders such as World Bank and the IMF have maintained that the prevailing debt level is sustainable.

In terms of policy, the Treasury has put a debt ceiling of 74 per cent of the GDP, giving it a headroom of slightly over 20 percentage points relative to the present 52 per cent.

The Medium Term Debt Strategy Paper shows the ceiling was approved by Parliament in the last budget cycle.

Even so, the IMF believes that Kenya should try and not escalate the debt too much and only borrow where it is intended to bridge the infrastructure gap and meet spending for social services.

The lender reckons that it is important for Kenya to maintain some headroom for possible future adjustments.

Such adjustments could be in terms of foreign exchange borrowing should the local currency face turbulence as well as in terms of introducing a stimulus spending programme should there be a deterioration in the macroeconomic environment or the global economic conditions.

“It will be important to undertake a growth-friendly reduction in fiscal deficits over the medium term to maintain debt sustainability and reduce external current account deficit,” said IMF first deputy managing director David Lipton when he visited Kenya between May 7 and 10