The government has admitted that war in Somalia is putting pressure on the country's economy and putting challenges to implementation of the budge read last June.
In a letter by Finance Permanent Secretary Joseph Kinyua to all ministries, the government has also conceded that that the raise of salaries for the military effected last June, the cost of implementing the new Constitution, high inflation rates and the weakening of the shilling against major foreign currencies had put major challenges to implementation of the budget.
"Additional spending pressures have built up, mainly to support the implementation of our new constitution, deal with security operations along our boarder with Somalia, salary demands, and servicing of increased external debt in shilling terms and government expenditure on import of goods an d services following the weakening of the shilling exchange rate against major currencies," said the PS.
Kinyua's letter to all Permanent Secretaries is dated December 23, 2011 in which the treasury PS also attached the 2012 budget review and outlook paper. "Since the implementation of the 2011/12 Budget in July 2011, the economic environment has worsened. High inflation stemming from higher food and fuel prices and deteriorating global economic conditions have threatened economic expansion," the PS told his peers.
The PS also cited the depreciation of the shilling against major foreign currencies as having strained the economy. He said revenue had fallen behind target, mainly due to changes in withholding mechanism and slow growth. The PS added that for the first quarter of the financial year, ordinary revenue was below target by about Sh 15 billion. He said performance to November 2011 was not better with cumulative revenue shortfall to Sh 18 billion.
The PS further explained that domestic borrowing has been constrained by the volatility in the money market interests and investor uncertainty as a result of high inflation and weakening of the shilling. Kinyua gave a further gloomy picture saying there have been under subscription of Treasury Bills and Bonds in the auction market for government securities.
"As of mid December 2011, almost half-way through the year, the Government had only managed to borrow about Sh 4 billion against a target of Sh 119.5 billion for the entire financial year," the PS added. The PS further explained that the high inflation and the subsequent need to tighten monetary policy have as well impacted negatively on interest rates.
He said for example, 91-day T-Bill rate has risen from 3.3 percent in April 2011 to almost 17 percent in November 2011, thus raising the cost of borrowing on the budget. "Under these circumstances, the implementation of the current budget has been challenging," said Kinyua. The PS said to overcome the challenges, the government has sought alternative sources of funding by way of a "syndicated loan" of up to 52.2 billion.