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NAIROBI (Capital Markets in Africa) – Kenya plans a slight increase in government spending ahead of general elections in August as concerns increase that it could be taking on more debt than it can handle to finance its budget.
Treasury Secretary Henry Rotich told lawmakers the government planned to increase spending to 2.287 trillion shillings ($22.2 billion) in the fiscal year that starts in July, a 2.6 percent increase from 2016-17.
“We shall continue to progressively reduce the fiscal deficit and ensure the continued sustainability of our debt,” Rotich said Thursday in the capital, Nairobi. “The sharp reduction of the deficit reflects reduced expenditures owing to the one-off expenditures mainly those related to the general elections and the drought, which are not expected to recur.”
The budget has been brought forward from the usual June date to allow enough time for parliament’s approval before it’s dissolved ahead of elections on Aug. 8. Growth in East Africa’s largest economy risks being weighed down by a drought and a law capping the interest commercial banks can charge to 4 percentage points above the central bank’s key rate.
Treasury sees the fiscal budget narrowing to 6 percent of gross domestic product from an estimated 9 percent. It plans to raise 268 billion shillings from domestic markets in the coming fiscal year and to borrow an additional 256 billion shillings externally to help plug that shortfall, Rotich said.
Treasury will amend the Public Finance Management Act to allow the issuance of Sukuk bonds as a source of financing in the coming year, Rotich said.
Rising debt-service costs could significantly undermine the government’s targets to narrow the fiscal deficit to 5.2 percent of GDP in 2018-19, Ahmed Salim, Dubai-based vice president of Teneo Strategy, said in a note before the budget was presented.
Rotich said monetary policy will target to keep inflation within the government’s target range of 2.5 percent and 7.5 percent. To reinforce price stability, the government’s fiscal policy will help to keep interest rates low and stable and the exchange rate steady and competitive to support exports, he said.
“We’ve got to accept we are in an election year and there’s some thumb priming that’s needed in the economy,” Aly-Khan Satchu, chief executive officer of Nairobi-based Rich, an adviser to companies and wealthy individuals, said by phone. “It’s an expansive budget. It’s a big number to be financing. Overall it was a bullish election-minded budget.”