Budget cuts: Why markets have remained skeptical

Financial markets have maintained a very skeptical attitude towards the nation’s economic prospects and the regime’s management of the economy, despite the regular lofty promises.

They are unlikely to be persuaded by the announcement by the Kenya Kwanza regime earlier this week of Sh130.2 billion in budget cuts. Here is why.

First, budget cuts have been promised several times before – in September last year, in February this year and now.

In addition, every policy document from the Treasury in the last five years has promised fiscal consolidation. They reality is that the nation has long been living beyond its means, and the chickens are coming home to roost.

This year’s budget policy statement acknowledges that government expenditure has grown faster than the now rather punitive taxation can keep up with. All policy documents acknowledge that the high, sustained and growing budget deficit has pushed the country into debt distress. The deficit has become structural.

But none of the previous promises of budget cuts were kept.

This week’s communication was quite flowery. “Cabinet considered the progress being made in the implementation of the financial year 2023/24 budget.

Arising therefrom, and as part of the administration’s fiscal consolidation plan that seeks to contain fiscal deficits, the Cabinet sanctioned the reduction of the recurrent budget of each Ministry and State Department by 10 percent.

The proposed budgetary cuts will be effected as part of Supplementary Appropriations No.1 of the financial year 2023/24 budget cycle,” the regime said on Tuesday.

However, and secondly, the Budget Review and Outlook Paper tells a different tale from the cabinet dispatch.

According to the budget review and outlook paper, recurrent spending for the current financial year is increasing from Sh2.536 trillion to Sh2.687 trillion.

Development spending will increase to Sh793.8 billion. Overall government spending will increase to Sh3.914 trillion, Sh168 billion more than the Sh3.746 trillion shillings approved in June.

As a result of these increases, the budget deficit is projected to increase to Sh864 billion. Further, net external financing is expected to rise to Sh448.7 billion from Sh131.5 billion while net domestic borrowing will be reduced to Sh415.3 billion from Sh587.4 billion.

Reducing the amount to be borrowed from the domestic financial market would be a welcome move, given the very high interest rates. otal interest payments on domestic debt are 4.02 times the amount paid in interest on foreign debt.

The switch from domestics to foreign borrowing is also a response to the persistent under-subscription of all government securities with the exception of the 91-day T-bill. The financial market has only been willing to lend government for 91 days, which have been consistently oversubscribed.

Third, the financial markets certainly recalls that travel, entertainment, training and publicity budgets were reduced in the Sh300 billion budget cuts announced by the regime in September last year. But the regime not only failed to reduce that budget, but actually increased spending by Sh56 billion.

Fourth, while the cabinet is the apex decision making body of government, the Treasury documents are the legal instruments of public finance management, not presidential or cabinet dispatches.

The budget review and outlook paper is a requirement of the public finance management act. It kick-starts the budget making process of the next financial year.

Highlighting the policy confusion, the Central Bank’s Monetary Policy Committee retained the benchmark Central Bank Rate at 10.5 per cent in their latest review. This was on the same day the regime was announcing the budget cuts.

Another key consideration in the decision to keep the CBR unchanged was the revised fiscal framework for 2023/24, contained in the budget review paper. The projected increase in the fiscal deficit will create further inflationary pressure.

This is why markets are skeptical of the current mix of fiscal and monetary policies. To slow down inflation, government should be reducing its expenditure not increasing it. Worse, the expenditure increase is financed through higher taxes and borrowing, while at the same time driving interest rates higher. The high taxes and borrowing have the effect of slowing down economic growth!

What then are markets to believe? The flowery communication of the cabinet dispatch or the legal actions of tabling budget review and outlook paper? Like the Central Bank’s Monetary Policy Committee, they are likely to rely on the budget review.

Actions speak louder than words. The markets have remained unmoved. In last week’s treasury bill and bond auctions, investors stayed away from tap sales of the two and ten-year bonds. The Sh15 billion offer attracted a paltry 22.5 per cent subscription. The treasury bills performed poorly, with subscriptions of 8.1% and 18.4%, for the six months and one-year T-bills respectively.

At the Nairobi Securities Exchange, the sell-off by foreign investors continued, earning the exchange the unenviable label of worst performing in the world.

@NdirituMuriithi is an economist