What defined fiscal and monetary policy in 2015?

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This article appeared in my weekly column in the Business Daily on January 3, 2016

This year has been an enlightening and tumultuous year for the Kenyan economy. Let’s take a look at fiscal policy and monetary policy action that defined the year.

In terms of fiscal policy, the Kenyan government continued on its trajectory on increasing planned expenditure, widening fiscal deficits and increasing borrowing. According to the IEA, the 2013/14 it was KES 1,640.9 billion, 2014/15 was KES 1,773.3 trillion and for 2015/16 it was a massive KES 2.2 trillion. These consistent increases in annual budgets are important for two reasons; firstly, it puts pressure on government to increase revenue generation yet government planned expenditure is increasing at a far higher rate than its ability its ability to generate revenue; in 2014/15 KRA managed to raise about KES 1.001 trillion– the budget for 2015/16 is double that.

Secondly, yearly increases in planned spending have been correlated by growing fiscal deficits as government finds itself unable to raise the funds for the annual budgets. Indeed, Treasury’s 2015/16 fiscal policy included a planned fiscal deficit of 8.7 percent of GDP, this has since shot up to about 12 percent due to borrowing for the SGR. These figures are well above Treasury’s own 5 percent fiscal deficit target. Another important development in this docket was the scrutiny government’s fiscal management underwent over the year particularly with regards to the Eurobond and allegations of corruption and the mismanagement of public funds. In short, the local and global perception of Kenya’s fiscal management practice took a beating this year.

(source: http://www.ambestenconsulting.es/images/FISCAL-emprendedor-final-ingles.jpg)

Monetary policy this year has been defined by managing the depreciation of the KES. Over the course of the year, the Kenya shilling had been tanking, reaching a high of 106 to the US dollar at one point. Current conditions make KES depreciation more anxiety inducing not only because of Kenya’s Current Account Deficit which remain substantial, the country is racking up foreign denominated debt. As per the monthly debt bulletin released by the Treasury in July 2015, Kenya’s public debt stood at KES 2.891.71 billion, 49.06 percent of the total debt is domestic debt while 50.94 percent is external debt. With high import bills and the constant pressure to meet foreign denominated debt obligations, CBK was aggressive in the action it to manage the depreciation.

(source: http://www.forextradeoracle.com/images/ForexTradeOracle.jpg)

One step the CBK took to manage KES depreciation was the direct sale of FX, which it did and led to a fall in FX reserves from USD 6.8 billion in late May to USD6.5 billion in July. Secondly, CBK fiddled with interest rates and raised the Central Bank Rate (CBR) to 10.0 percent in June 2015 from 8.50 percent, which had been stable since May 2013. CBK then again raised CBR from 10 percent to 11.5 percent in July 2015. However, raising interest rates tends to slow economic growth due to reduced investments and consumption. The conundrum here is that the performance of the Kenyan economy is likely to be negatively affected by a hike in interest rates; yet the Treasury’s initial rosy growth projection of up to 7 per cent this year was based on interest rates remaining stable at around the May 2013 levels. Remember that the Kenyan economy is already performing at the subpar level of overall growth of 4.9 percent thus far; interest rates hikes make the prospects of the rates of future GDP growth even grimmer. Finally, in order to manage KES depreciation, the CBK sought to drain excess liquidity from the market such as by offering KES 6 billion in repurchase agreements in June.

In terms of 2016, one can expect continued scrutiny of Kenya’s fiscal policy and management, particularly with regards to seeing if government will put a lid on spending, reduce borrowing and demonstrate accountability is fiscal management. With regards to monetary policy interest rate management is likely to preponderate as well as the management of inflation which has been rising recently.

Anzetse Were is a development economist; anzetsew@gmail.com.

You can read more on this topic in a comprehensive document I’ve written on Kenya’s fiscal and monetary policies>>https://www.academia.edu/19288762/Kenyas_Fiscal_and_Monetary_Policies_Is_government_getting_it_right


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