Quick construction of the SGR pushes up Budget deficit

Kenya’s fiscal deficit widened in the year ended June due to an extra Sh45.6 billion spent on the standard gauge railway (SGR), as the project progressed at a faster pace than initially scheduled.

According to the National Treasury’s update on the annual budget, the total spending on the SGR— including the extra Sh45.6 billion — by June was Sh123.5 billion.

The total budget for the project is more than Sh400 billion, with most of it to be loaned by the Chinese government.

The update also shows that the spending caused the fiscal deficit to be revised upwards to 12.2 per cent of the gross domestic product (GDP) although lower spending in other development projects finally resulted in a deficit of 9.4 per cent, still higher than the initial estimate of 7.4 per cent.

In cash terms, the deficit was 8.3 per cent by June, with a significant 1.9 per cent being a result of the SGR alone.

In terms of the GDP, the railway took an extra 0.8 per cent in spending, but the government has estimated its impact on the economy will be two per cent of the GDP annually.

“The higher deficit in financial year 201415 was due to the implementation of the SGR. Including grants and excluding expenditures related to the SGR the deficit for the financial year 201415 was therefore 6.4 per cent of GDP,” said the Treasury in the update. Because of the fast pace of implementation, the Treasury was forced to release cash for the construction earlier than scheduled.

“The execution of the Standard Gauge Railway (SGR) has proceeded faster than expected, resulting in a front loading of development spending of about 0.8 per cent of GDP,” said the Treasury.

According to the update, the overall deficit is to decline in the medium term — a period of up to three years — with the completion of the SGR. Having moved at a more rapid pace than originally envisaged, the project is expected to be completed by end of 2017.

“In the medium term, the overall budget deficit and current account deficit are projected to decline as major infrastructural projects such as the Standard Gauge Railway (SGR) and [others] currently being implemented by the Government are completed.”

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Though the spending on the SGR during the year was above initial expectations, the Treasury said other development expenditures by ministries, departments and agencies (MDAs), were below target by Sh175.8 billion because of reasons ranging from delay in procurement to failure by donors to disburse budgeted funds.

“The underperformance in development expenditure reflects low absorption of domestically financed development by MDAs, delay in procurement and low absorption of external funds from development partners,” the update said.

It reveals that the amounts of the deficit was revised drastically as the 201415 fiscal year approached the end. The net external financing was revised to S01.9 billion —though only Sh216.4 billion was raised due to low donor disbursements. Domestic borrowing had been revised to S14.3 billion but it turned out to be Sh251.1 billion.

The revised fiscal deficit became Sh616.2 billion, nearly double the S42.4 billion initially planned as indicated in the 201415 Budget Statement.

In actual spending, the deficit realised was, therefore, Sh467.5 billion as at June, Sh125.1 billion more than initially indicated in the statement.