Gov’t to undertake austerity measures to cut budget deficit

The Government is expected to undertake a range of austerity measures that would reduce budget deficit to 5.7 percent in the next financial year as well as embark on a substantial review of the interest rate cap.

According to the International Monetary Fund staff team that visited the country last month, this would allow the country access the 150 billion shillings standby credit facility.

Kenya has requested for a six-month extension of the credit facility which expires next week.

National Treasury CS Henry Rotich appearing before the Senate Finance and Budget Committee, revealed a revenue shortfall amounting to Ksh 84 billion that would prompt a review of the Division of Revenue Act, subsequently reducing allocation to counties by Ksh 17 billion shillings.

Revenue shortfall has resulted in budget deficits and led to a public debt surge which is now 60% of the GDP.

The end of mission statement by the IMF staff which concluded its visit last week indicates that Kenya has agreed to cut fiscal deficit to GDP to 7.2 percent in 2017/18 financial year and further to 5.7 percent in 2018/19 down from 8.8% in 2016/2017.

IMF says this will be achieved by a combination of revenue measures and contained spending.

Kenya is also expected to modify the interest rate cap or abolish the law altogether as it has “contributed to slow overall credit growth to the private sector and lower access to credit by SMEs and individuals”.

The lender further says the law undermines the effectiveness of monetary policy which ensures price stability and supports sustainable economic growth. Severe drought and a prolonged election period in 2017 are estimated to have slowed economic growth by 4.8%.

However, IMF notes that annual growth rate could rise further to 6½ percent within a couple of years, provided Kenya continues with economic reforms focusing on deficit cuts and interest rate control.

The Fund further says Kenya’s Ksh 700 billion worth of foreign exchange reserves at the end of January is sufficient to withstand any potential near-term external shocks.

Kenya has placed a six-month extension request to complete outstanding review of the program before accessing the Ksh 150 billion standby credit facility which expires March 13, 2018.

The facility was frozen last year. The request will be presented to the IMF Executive Board by Monday next week while outstanding program reviews could be completed by September 2018.


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