5 January 2013

Kenya: Treasury Embarks On Austerity Measures

The treasury is preparing for deep expenditure cuts mainly from development vote to finance pre-election activities. Development projects that are deemed unlikely to start within this financial year will be the most affected as the treasury redirects their budgetary allocation to plug a Sh100 billion gap.

The bulk of new spending priorities emerged from requirements for implementation of the constitution and military operations in Somalia. An additional Sh30 billion expenditure relates to salary awards to teachers, lecturers and health workers and police.

This is contained in the Pre-election Economic and Fiscal Update released on Thursday. "Increased incidences of insecurity in various parts of the country call for additional expenditure" says the update. Finance minister Njeru Githae cites additional spending pressures and revenue collection shortfall as the main reasons for the planned expenditure cuts.

Cumulative revenue receipts up to November last year amounted to Sh281 billion Sh43.7 billion short of the targeted Sh324 billion, attributed to underperformance in VAT and income tax revenues which recorded a total of Sh29.5 shortfall.

Domestic borrowing in the first five months was nearly twice the targeted 31.8 billion to stand at Sh71.3 billion, leaving the treasury with difficult alternative sources of money. According to the update the weakening in growth traces its sources from poor performance in agriculture, building and construction and low demand of Kenyan goods in the European markets.

"At the global level, the negative spillovers from euro debt crisis and sluggish growth in the US together with individual country specific challenges have held back activities in emerging markets and developing economies and this has affected the Kenyan economy," the update says.

The pre-election update paints a grim picture of growth ahead, with projections that the real GDP is expected to grow at 5.6 per cent this financial year, followed by 5.9, 6.2 and 6.5 in subsequent year to 2015/2016 financial year.

"These growth rates are not enough to support the employment and poverty reduction that the country requires," the update states.

The update warns that unsuccessful transition to a decentralized system of government could weaken investors' confidence consequently leading to slower growth than projected. The Pre-Election Economic and Fiscal Update is a mandatory requirement under the public finance management act Finance minister, which must be published not less than four months before elections.

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