Economic Analysis - Constrained Spending Will See Slow And Fragile Progress - NOV 2017


BMI View : Substantial budget deficits and an increasing debt burden will see the Kenyan government pull back from recent fiscal expansion over the coming quarters. This will improve the country's sovereign credentials, but a spit government after an election re-run could slow any progress.

A move towards tighter fiscal policy over our short-term outlook to 2019 will see Kenya's budget deficit begin to narrow in the coming quarters. In recent months, the government has recorded a substantial uptick in recurrent spending, fuelled by increasing public sector wages and the cost of holding national elections (at the time of writing it seems likely the government will have to hold a second presidential election before year-end 2017). In the fiscal year that runs from July 2016 to June 2017 (now standardised and attached to the 2017 calendar year in our own data), this ramp-up in recurrent expenditure led to a fiscal deficit of 9.6% of GDP, drawing criticism from the IMF and international investors.

Although at the time of writing it is still unclear which candidate will win the rescheduled presidential election, our core view holds that a Jubilee-controlled government following President Uhuru Kenyatta's re-election will push ahead with more stringent fiscal policy, bringing the deficit to 7.8% of GDP in 2018 and 6.6% in 2019. Given the recent ramp-up in recurrent spending and the government's ambitious infrastructure project pipeline, we believe the former will make a likely target future spending cuts. Indeed, following the August general election, Jubilee members of the National Assembly affirmed their commitment to reining in government spending in the term ahead.

Increasing Debt Burden Will Trigger Spending Pullback
Kenya - Fiscal Position
f = BMI forecast. Source: CBK, BMI

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