Kenya treasury shuns austerity with spending-plan increase

Kenya’s Treasury surprised analysts and investors by proposing to increase spending, backtracking on an earlier plan to reduce expenditure because of the weak economy.

The government put forward a plan to boost the budget by 50.6 billion shillings ($498.8 million) just days after the International Monetary Fund agreed to lend East Africa’s biggest economy $1.5 billion in precautionary loans to shield it from exogenous shocks.

The nation’s Consolidated Fund and recurrent expenditure will increase by 44.2 billion shillings in the fiscal year through June 2016, according to the Treasury’s supplementary budget tabled in parliament on Tuesday. Development expenditure will go up by 6.36 billion shillings.

“It sends out a very bad signal that they’ve not managed their funds well,” Vinita Kotedia, a fixed income analyst at Genghis Capital, said by phone from the capital, Nairobi. “50 billion, even though it may not be significant in the budget, still looks bad just a couple of months before we close the calendar.”

Central Bank Governor Patrick Njoroge said in December scaling back spending would help reduce interest rates.

Revenue Targets

In his June 2015 budget presentation, Kenyan Treasury Secretary Henry Rotich factored in an 8.7 percent budget deficit. He expected to bridge the gap partly by borrowing 570.2 billion shillings locally and offshore to supplement government revenue that was forecast at 1.36 trillion shillings.

The Kenya Revenue Authority, however, missed its first-half collection target by 59 billion shillings as the economy slowed, the local currency weakened and high interest rates constrained businesses, reducing tax payments.

“The additional expenditure will be financed through budget rationalization and borrowing,” according to the Treasury document.

Treasury also wants to augment funds set aside for a proposed rights offer at its broke national carrier, Kenya Airways. The government, which holds a 28 percent stake in the airline known as KQ, may increase its shareholding to 50 percent, depending on the appetite of other shareholders to participate in a cash call, Rotich said in February.

It increased the amount for “onlending to KQ rights issues and budget rationalization” by 27 percent to 59.96 billion shillings.

Rotich said in February that Treasury’s plan to lower spending by an estimated 4.5 percent would not harm growth. Kenya projects economic expansion of 6 percent this year from an estimated 5.6 percent in 2015. Activity in the mainly agricultural producer has sputtered in recent years following droughts that cut tea output and Islamist attacks that hurt tourism, its two main sources of foreign exchange and employment.

While the government had gone against market expectations, it could have been forced to do so because of lower-than-anticipated tax revenue in a tough business environment, according to Fred Mweni, chairman of Nairobi-based African Asset Management.

“If they are coming to the market for just 50 billion shillings, then I think the government really tightened its belt,” he said.

– Bloomberg