Kenya government to restructure spending to cope with unfolding global financial crisis

By Ben Kinyanjui

The Government will restructure its spending in an effort to cushion the country from the negative impact of the unfolding global financial crisis.CBK has resisted pressure to raise yields for Treasury Bills

According Economic Secretary Dr Geofrey Mwau the unfolding crisis triggered by the debt crisis in some countries in Europe is likely to affect the exports to the European Union (EU) tourist arrivals as well as remittances from the high income countries.

The EU is the largest export market for Kenya’s horticultural products including flowers, fruits and vegetables. It is also the largest tourist’s source market.

However, the debt crisis that is pushing the entire Euro zone into a recession is also expected to reduce significantly overseas development assistance to developing countries as the donor countries implement stringent measures to cope up with the crisis seen as worse than the one experienced in 2008/2009.

“During the last crisis, we had more fiscal space as our debt ratio stood at 42 per cent. We could afford to expand to 47 per cent but not anymore,” says Mwau.

He says the government wills increases the pace of spending saying some ministries hardly spent more than 50 per cent of project funding most of it coming from donor agencies.

With the government using less than 10 per cent of donor funds to finance its budget, Mwau says decline in aid would not affect government programmes. The government has relied mostly on the World Bank and the African Development Bank for funding mostly in infrastructure.

Sources say the Government has also opted for external borrowing where it is seeking $600 million (Sh5 billion) to complete the on-going infrastructure projects mainly in roads and energy.

Dr Mwau confirmed that the government would reduce similar amount from its domestic borrowing schedule for this financial year ending June in order to ease pressure on Treasury Bills and bring interest rates down.

The revelation comes at time when the World Bank in its Global Economic Prospects 2012 said the world is headed to another economic crisis that will affect millions of people across the global.

“The world economy has entered a dangerous period. Some of the financial turmoil in Europe has spread to developing and other high-income countries, which until earlier had been unaffected,” says the report launched in Nairobi by Mr Andrew Burns, manager for Development Prospects Group, World Bank in Nairobi Monday.

This contagion has pushed up borrowing costs in many parts of the world, and pushed down stock markets, while capital flows to developing countries have fallen sharply.”

The Bank warns that most countries have no ability to cushion themselves against the impact, making the new round of global financial crisis more severe and devastating.

“In the even of a major crisis, the downturn may well be longer than in 2008/09 because high-income countries do not have the fiscal or monetary resources to bail out the banking system or stimulate demand to the same extent as in 2008/09.”

“Although developing countries have some maneuverability on the monetary side, they could be forced to pro-cyclically cut spending-especially if financing for fiscal deficits dries up.”