The National Treasury, in its proposed budget for the Financial year 2023-2024, projects to borrow Kshs 0.7 trillion to finance its fiscal deficit, out of which Kshs 0.6 trillion will be sourced domestically while the remaining Kshs 0.1 trillion will be foreign debt.
Read more: State of Kenya’s Public Debt
In its proposal, the treasury has significantly increased its domestic borrowing target by 37.0% to Kshs 0.6 tn from Kshs 0.4 bn in the financial year 2022-2023 while at the same time reducing the foreign borrowing target by 66.8% to Kshs 0.1 bn from Kshs 0.4 bn in the previous year.
The government seems to be shying away from foreign debts due to the depreciation of the Kenya shilling, which has continued to apply more pressure on the debt servicing obligations. Currently, the shilling has a year-to-date depreciation of 13.7% to Kshs 140.3 from Kshs 123.4 at the beginning of the year.
Read more: Kenya Shilling to Continue Depreciating- Absa Bank Report
However, the government’s appetite for debt financing has reduced, with the Budget deficit decreasing by 12.9% to Kshs 0.7 billion from the Kshs 0.8 billion target for the previous year. The slower decrease in budget deficit is attributable to the 15.7% increase in the projected revenue target to Kshs 3.0 bn, which has outpaced the 8.7% projected expenditure to 3.7 bn.
Notably, the growth of domestic debt has the potential to crowd out local businesses as the government will be competing with them for loanable funds from the banks. This has the effect of increasing interest rates, which in turn reduces borrowing and spending by businesses. Consequently, we might see a slowdown in economic growth due to the crowding-out effect.
Read more: What Can Kenya Learn from Ghana’s Borrowing System?
