Kenya has revised up its budget deficit forecast for the fiscal 2014/15 year to end-June by KES153.9mn to KES496.5bn ($5.4bn), the Treasury said in its draft 2015 Budget Policy Statement. The revision reflects a revenue shortfall of KES17.8bn due to lower than expected income tax, import duties and investment income, and additional expenditures of KES136.9bn.

As a percentage of the revised GDP estimate, we calculate that Kenya’s budget deficit (after grants) will increase to 8.8% this year from initially projected 6.1% and compared to 6.0% in 2013/14. The shortfall is projected to narrow gradually to about 4.1% of GDP in 2017/18, allowing public debt to decline gradually from 43.8% of GDP in 2014/15 to 41.2% of GDP by 2017/18.

The budget deficit will be financed by from the proceeds from the country’s debut Eurobond (KES141.4bn), net foreign financing to the tune of KES208.3bn, and net domestic financing of KES144.8bn. Thus, the Treasury has lowered its domestic borrowing target by KES46bn at the expense of higher foreign funding.

For the first half of the 2014/15 fiscal year, Kenya’s fiscal deficit (on a commitment basis, excluding grants) reached KES96.8bn, down 13.1% y/y, and below the projected KES204.8bn. Including grants, the shortfall reached KES89bn (1.3% of GDP), down 13.2% y/y, and below a target of KES102.6bn (3% of GDP).

The lower-than-projected fiscal gap was mainly due to lower expenditure. Total spending was KES614bn during the period, by 20% below the plan with both recurrent and development costs below target.

Total revenue and grants grew 12% y/y to KES525bn, but were by 11% below the plan, as both tax collection and grants undershot their targets.