IMF touts for further tightening fiscal policies

Further tightening of fiscal policies will be needed in the 2012/13 budget to reduce the overall deficit and keep net domestic financing at low levels.

According to the Third Review under the Policy Support Instrument (PSI) by the International Monetary Fund (IMF), the focus should be on strengthening the revenue base and streamlining recurrent spending.

"Fiscal policy in 2011/12 financial year has been tightened basically due to the deteriorating financing climate since mid last year and because of the soaring inflation," states the report, noting that the authorities are eliminating non-priority recurrent expenditure and delaying some development spending to next year.

The move is expected to reduce the projected overall fiscal deficit for the current financial year from a budgeted 7.5 per cent to 6.5 per cent of the Gross Domestic Product (GDP).   

The fiscal deficit and recurrent spending for the 2010/11 exceeded programme projections by seven per cent of the GDP on cash basis, compared with a programmed 6.5 per cent.

Recurrent spending, according to the report, exceeded PSI projections by one per cent of GDP, reflecting a lack of success in compressing goods, services and transfers spending as much as had been programmed. 

The Central Bank (BoT) has tightened its reserve money programme for 2011/12 fiscal year and domestic interest rates have risen sharply since mid 2011.

In an environment of rising inflation and government financing needs, the Bank adhered closely to its monetary programme.

Apart from a sharp rise of short term interest rates, the shilling depreciated during most of 2011, before starting to pick up in November.

Likewise, exchange rate depreciated 12 per cent against the dollar through October before stabilizing after interest rates rose. Financial soundness indicators are generally favourable, with a nonperforming loan ratio of 8 per cent, showed the IMF report.

Revenue collections were slightly higher than envisaged, with good performance in excise and income taxation.

At the same time, domestic payment arrears equivalent to about 1 per cent of GDP were carried over into 2011/12, largely in respect of road projects.
Source: The Daily News,, reported by Sebastian Mrindoko
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