LIQUIDITY

State budget cuts to slow down economic growth- report

Kenya's debt burden may impair policymakers' response to "shocks” which may continue to dampen the investment landscape

In Summary

•Necessary adjustments should be careful and deliberative to allow businesses and individuals time to adjust to any changes in government programmes and tax policies

•The National Treasury said it can’t rule out the second supplementary budget for the current financial year

Nelson Gaichuhie, CAS The National Treasury and Planning and John Gachora, the NCBA Group Managing Director during the launch of NCBA 2020 Economic Outlook Report at Radisson Blu Hotel Nairobi
Nelson Gaichuhie, CAS The National Treasury and Planning and John Gachora, the NCBA Group Managing Director during the launch of NCBA 2020 Economic Outlook Report at Radisson Blu Hotel Nairobi
Image: COURTESY

Cuts on the government budget at a time when business confidence is fragile and individual incomes weak may slow economic activity, NCBA Bank has warned in its economic outlook.

The lender said the move is likely to hamper liquidity flow as more funds are dedicated to external debt repayments, hurting the private sector.

NCBA Group managing director John Gachora said debt levels have appreciably risen and besides devoting a considerable portion of national income to debt servicing, the debt burden may impair policymakers' response to "shocks” which may continue to dampen the investment landscape.

“Necessary adjustments should be careful and deliberative to allow businesses and individuals time to adjust to any changes in government programmes and tax policies,” said Gachora.

His sentiments are coming barely a day after the National Treasury said it can’t rule out the second supplementary budget for the financial year.

“Low revenue collection and pressure to cut on borrowing leaves us with no option but to up austerity measures. I cannot rule out the possibility of a second supplementary budget,' said Treasury CS Ukur Yattani last Wednesday at a meeting.

The plan for a second supplementary budget is coming just two months after the Parliament made changes to the budget read June last year.

The report, however, stated that Kenya’s economic growth has expanded by 5.8 per cent compared to 6.3 per cent a year earlier.

The solid growth was against a backdrop of a growing “show me the growth” narrative and public angst over public finance management.

The report also highlights that the trade-offs of ensuring robust demand and at the same time public debt sustainability on a backdrop of rising political tensions will make for a challenging policy landscape.

Growth is projected to remain near its potential at 5.7 per cent in 2020.

Gachora said that Kenya’s growth has an estimated potential growth of six per cent in 2020.

The earlier phase of fiscal consolidation will still see healthy government spending at 23 per cent of GDP. Monetary easing may also offset some effects of fiscal retrenchment.

However, the growth estimate is predicated on the assumption that the government will successfully manage the risks posed by record debt levels, fragile investor sentiment, weak credit markets, and emerging political uncertainty.

The government in January said it intends to cut spending by an estimated Sh100 billion in the financial year starting July to reflect depressed tax revenue streams.

This would help in lowering the deficit t0 5.3 per cent by 2020/21.

“All government entities must live within their means, which is expected to reduce spending on non-essentials such as travel, advertising, and entertainment perks,” said Treasury CS Ukur Yattani during a meeting to prepare the government’s 2020/2021 budget.