Kenya's finance minister forecast on Thursday a 2015/16 budget deficit of 8.7 per cent of gross domestic product, up from the 7.8 per cent that had been predicted for 2014/15, fuelling analysts' concerns about the financing burden.
Henry Rotich also said in his budget speech that he was scrapping the five per cent capital gains tax on share sales, a move welcomed by traders. The tax, imposed in January, had driven down business on the stock market at the start of the year.
In his two trillion shilling ($20.6 billion) budget for the financial year starting on July 1 he outlined extra cash for security after a spate of Islamist militant attacks that has hammered tourism and more funds for a new railway.
He said the deficit would be 6.5 percent if he excluded spending on the new Mombasa to Nairobi railway.
In December, the Finance Ministry forecast the 2014/15 deficit would be 7.8 per cent of GDP.
"A deficit of 8.7 per cent is very worrying," said Razia Khan, Africa economist at Standard Chartered Bank, adding even the 6.5 per cent figure was a concern.
"This is especially the case as Kenya is growing rapidly now. And it should ideally be showing lower deficits at this point of an upswing in its economic cycle," Khan said.
Rotich told parliament the economy would grow by 6.5 per cent to 7 per cent in 2015, continuing that path in the medium term.
He also said he would ensure state borrowing did not crowd out private business, saying the government would rely heavily on external concessional financing and would tap international markets as it did with its 2014 Eurobond.
Referring to the oversubscribed Eurobond, he said: "We intend to continue sourcing these type of funds, including from export credit agencies and syndicated loans."
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But analysts said conditions had changed since last year, so the government could find raising funds abroad more costly now.
"I'm not so sure the market is as liquid both domestically and internationally as it was last year when you could put your hand up and everyone was ready to write you a cheque," said trader and analyst Aly Satchu Khan. "That remains a concern."
On the financial markets, the minister proposed scrapping a capital gains tax of five per cent on share sales and introducing a 0.3 percent withholding tax on the transaction value of the shares. Trading volumes plunged with the capital gains tax.
Willie Njoroge, head of Kenya Association of Stockbrokers and Investment Banks, said the capital gains tax was an "administrative nightmare" but the new tax would be easier.
"This will be very reassuring to investors," he said. "We shall register increased volumes in terms of transactions."