Fiscal deficit hits Sh953b in the FY2021/22 budget

Lewis Njoka @LewisNjoka

Fiscal deficit increased by Sh112. 3 billion in financial year 2021/22 after the budget estimates surged to Sh3.6 trillion.

This comes at a time when experts say reducing the budget deficit is the best way to solve the challenge of ballooning public debt facing the country at the moment. 

A fiscal deficit is a shortfall in a government’s income compared with its spending. A government that has a fiscal deficit is spending beyond its means.

National Treasury projects a deficit of Sh952.9 billion (7.7 per cent of GDP) up from a deficit of Sh840.6 billion (7.5 per cent of GDP) in financial year in 2020/21.

The increase reverses a trend of reduction set in 2020/21where budget deficit reduced by Sh2.1 billion from Sh842.7 in financial year 2019/20 (8.3 per cent of GDP) to Sh840.6 billion (7.7 per cent of GDP).

“Given the projected expenditures in revenue, the fiscal deficit, including grants, in FY 2021/22 is projected at Sh952.9 billion (7.7 per cent of GDP),” reads the proposed budget.

External borrowing

The fiscal deficit will be financed through local and external borrowing with local borrowing forming the larger portion of the deficit.

Increased local borrowing, however, could hamper efforts by local businesses seeking to recover from the effects of the Covid-19 pandemic as banks will be less willing to lend them preferring to transact with the government.

“Financing of the fiscal deficit in FY 2021/22 budget, will be through net external financing of Sh291.3 billion (2.4 per cent of GDP and net domestic borrowing of Sh661.9 billion (5.3 per cent of GDP),” reads the budget proposal.

In the medium term (next three years), Treasury plans to maximize on concessional loans for external borrowing while limiting non-concessional, commercial loans and sovereign bond issuance to projects with high financial and economic returns, according to the proposed budget.

The government plans to diversify its sources by maintaining a presence in the domestic and international capital markets. 

Panda bonds

“Further, other possible financing options such as the Islamic financing instruments, green bonds, Samurai and Panda bonds and diaspora bonds over the medium term will be explored,” reads the proposed budget in part.

In the proposed budget, Treasury says the deficit is projected to decline to Sh775.3 billion (5.6 per cent of GDP) in FY 2022/23 and reduce even further to Sh613.8 billion (3.6 percent of GDP) in FY 2024/25 in accordance with its fiscal consolidation plan.

Experts have in recent times called on the government to reduce budget deficit saying it was the surest way to tame the public debt. 

According to Central Bank of Kenya figures, public debt stood at Sh7.3 trillion as of March 2021 comprising Sh3.8 trillion external debt and Sh3.6 trillion domestic debt. 

 “You control debt through the deficit. In my view, the better approach to managing debt and putting controls on it in Parliament or even in Treasury is by having a limit on the deficit itself,” said Mohammed Wehliye, an economist and a senior advisor at the Saudi Arabian Monetary Authority.

He said there was no need to have debt ceilings, as is currently the case in Kenya, because they Because they make no sense and are not observed anyway.

His views were echoed by Nikhil Hira, an economist at Bowmna’s Capital, who said by cutting on expenditure the government would reduce the budget deficit, hence, it wouldn’t need to borrow as much as it is doing currently.

“What we should be doing is saying, look, we have too much expenditure, let’s cap that,” Hira said.