Kenya targets a budget deficit of KES567bn ($5.8bn) for the fiscal 2015/16 year (starting on July 1), equal to 8.7% of GDP, Treasury data showed. This compares to an upwardly revised estimate for a shortfall of KES575.6bn for the current fiscal year, which we estimate at 10.1% of the projected nominal GDP. The gap is projected to narrow to 5.3% of GDP in 2016/17 and further to 4.0% in 2017/18.

The 2015/16 budget envisages revenues of KES1.358trn, up 16.7% from the 2014/15 projection, grants of KES73.5bn, up 10.8%, and expenditure of KES2.0trn, up 10.6%. Development spend of KES715.5bn (up 12.7%) has the highest share of total expenditure.

Excluding expenditures related to the high speed, high capacity Standard Gauge Railway (SGR), Kenya’s biggest ever infrastructure project, the deficit would decline to KES426.3bn, equivalent to 6.5% of GDP, Treasury secretary Henry Rotich noted, when presenting the budget to parliament on June 11. The KES1.2trn project is set to receive funding of KES118.2bn in the coming fiscal year, financed by a loan from China.

The 2015/16 fiscal deficit is planned to financed by net external funding of KES340.5bn (5.2% of GDP) and KES229.7bn (3.5% of GDP) of domestic financing. External financing will be largely on concessional terms, Rotich said, but added that the government will continue to diversify financing sources by tapping commercial sources in the international market. Kenya debuted on the international debt markets during the current fiscal year, raising a total of $2.75bn in two tranches.

The budget’s macro fiscal framework envisages a GDP growth of 7% in 2015/16 and consumer inflation within the government target of 2.5pp either side of 5% over the medium term. Total revenue is projected to improve gradually with on-going tax reforms to reach 20.8% of GDP in 2015/16 and 21.8% over the medium term.

The SGR project was launched in late 2013 and is expected to be completed by 2020. It will stretch from Kenya’s main port city of Mombasa through the capital of Nairobi to landlocked Rwanda, Burundi, Uganda, the Democratic Republic of the Congo (DRC), Ethiopia, and South Sudan. It is aimed to boost integration across East Africa by reducing transport costs, bringing down the cost of doing business and improving living standards.