President William Rutos recent efforts to raise around $2.6bn through tax increases failed after scores of protestors were killed in demonstrations across the country, compelling him to backtrack on the plan. The decision to abandon the contentious tax hikes, while politically expedient, has weighty implications for Kenyas economy and its relationships with its creditors.
Kenyas revenue shortfall has compelled Ruto to cut back on spending and rely even more dearly on creditors and the capital markets, signalling a challenging road ahead for economic recovery and debt management. The supplementary budget that the National Treasury recently presented to lawmakers shows that the countrys fiscal deficit has widened to 4.2% of GDP, from 3.3% that was forecast in the initial budget presented before the protests erupted. Additionally, the revised revenue is 9% lower than the initial forecast, while spending has been reduced by about 2%.
To bridge the gap, Kenya will tap into net external borrowing of Sh356.4bn ($2.72bn) and net domestic borrowing of Sh404.6bn ($3.04bn), Treasury principal secretary Chris Kiptoo told lawmakers while presenting revised budget estimates. He noted that the figures will likely change over the year.
Credit downgrades and expensive borrowingUnsurprisingly, Moodys has cut Kenyas sovereign rating deeper into junk territory. The credit ratings agency downgraded the countrys local- and foreign-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings to Caa1 from B3, citing diminished capacity to implement a fiscal consolidation strategy to contain its debt burden.
In the context of heightened social tensions, we do not expect the government to be able to introduce significant revenue-raising measures in the foreseeable future, the ratings agency said. It affirmed its negative outlook for Kenya, noting that the larger fiscal deficits will push up the countrys borrowing requirements.
