Fitch: Kenya's fiscal plan suggests shifting policy stance

Kenya's fiscal policy has been a topic of discussion as the government aims to reduce its expansionary nature in the upcoming financial year. Fitch Ratings has weighed in on the matter, highlighting both the positive and negative implications of Kenya's fiscal plan. Jermaine Leonard, Director of Sovereign Ratings at Fitch, provided insight into the rating agency's perspective on Kenya's current economic situation. The government's goal to narrow the fiscal deficit to 6% of GDP in the 2017/18 financial year is seen as a significant step towards fiscal consolidation. This shift implies a move away from the expansive fiscal policy that has been driving growth in recent years. However, Fitch maintains a negative outlook on Kenya due to concerns about the country's reliance on imports to fuel growth, which has led to persistent fiscal and external deficits. This has resulted in an increase in public sector debt and overall external debt. Leonard acknowledged Kenya's strong growth potential but emphasized the need for sustainable fiscal policies to maintain economic stability. The upcoming budget presents an opportunity for Kenya to address these concerns and demonstrate a commitment to fiscal discipline. While the plan to reduce the deficit is encouraging, Fitch remains cautiously optimistic, with a fiscal forecast of 6.5% for the year ahead. As Kenya navigates the challenges of balancing development expenditures and revenue generation, the focus shifts to finding alternative sources of growth once public spending starts to decline. The success of this transition will depend on the government's ability to attract private sector investment and improve the business environment. Despite the risks associated with fiscal adjustment, there are pockets of positivity and opportunity for Kenya. Development expenditures, which have been driving deficits, can be more easily controlled compared to current expenditures. This presents an opportunity for the government to align spending with its long-term growth objectives. Additionally, Kenya's relatively high revenue to GDP ratio provides a solid foundation for increasing government revenues. With a target to raise revenues to 24% of GDP, Kenya has a clear pathway to strengthen its fiscal position. As Kenya continues on its fiscal consolidation journey, the road ahead may be challenging but holds promise for sustainable economic growth and development. Fitch's assessment serves as a reminder of the importance of prudent fiscal management and the need for strategic policy reforms to secure Kenya's financial future.