Kenya to face higher borrowing costs as budget deficit climbs to 9.3 per cent

The International Monetary Fund (IMF) has warned that Kenya may face higher borrowing costs abroad due to a bigger 2016/17 budget deficit. The international organization has said however, that improved management of domestic borrowing will avoid the kind of spike in government debt yields seen in the local market in late 2015.

Finance Minister Henry Rotich had said this month that the overall 2016/17 deficit would be Sh691.5 billion, with Sh225.3 billion raised locally and Sh150 billion coming from external commercial borrowing. He noted that development aid funding will make up the balance.

The country’s budget deficit is forecast to climb to 9.3 per cent of gross domestic product in the 2106/17 fiscal year starting on July 1, compared to below 8 percent in the current 2015/2016 financial year, a jump which has raised investor concerns.

According to Armando Morales, the International Monetary Fund resident representative in Kenya, from July 1, Kenya would have a better cushion of domestic funds that had already been raised, which is more than Sh200 billion. The so called cushion would ease some pressure on government finances in the next fiscal year.

“That is a positive development and it gives the government some room to feel that financing is not going to be tight,” he told Reuters. He added that the government and central bank had raised cash while there was abundant liquidity.

“Although the terms of domestic financing are better than before, the terms of foreign financing may go in the opposite trend unless there is a revision of the fiscal projections,” Morales said. “It will be very difficult to approach creditors with a larger deficit than the previous year and expect benign terms.” The government has suggested that although the deficit is forecast at 9.3 percent for 2016/17, the actual figure is likely to come in lower because ministries typically fail to spend all their allocated funds on their development projects.

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