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UPDATE 2-Kenya's budget deficit likely to swell, finance minister says

(Adds comments on external debt, G-20 debt relief initiative)

NAIROBI, Sept 15 (Reuters) - Kenya’s budget deficit for this financial year could increase due to revenue shortfalls and coronavirus-related disruptions, the finance minister said on Tuesday.

Ukur Yatani, who set the deficit at 7.5% of GDP when he presented the budget in June, did not say how far the gap was likely to expand, adding that they were developing a plan to cover it.

“It might be just cutting on some expenditures, particularly the slow-moving projects, and… some state agencies are doing well so we are likely to get some substantial dividends,” Yatani told Reuters.

Revenue collection underperformed by 40 billion shillings ($368.49 million) in the first two months of the financial year, July and August, he said, adding that he will present a supplementary budget in December or January.

“In the next two, three weeks, we will have some firm road maps,” he said.

The government is in early talks with the World Bank, for the provision of an additional budgetary support loan, which was potentially going to be used in the 2021/22 fiscal year, the minister told Reuters.

The loan will be the third from the World Bank after the Washington-based lender started issuing such financing to the East African nation last year, saying the reforms carried out by the government had made it qualify.

The discussions for a third loan are tied to reforms in state-owned firms and agencies.

“We are looking at key areas of reforms ... restructuring them to ensure they are fit for purpose,” Yatani said.

The government can still service its external debts, Yatani said, after export earnings dropped due to the coronavirus crisis.

Exports of tea and flowers had rebounded after some lockdown measures were lifted in August, the minister said, adding that export earnings can only take an “upwards trajectory”.

The East African nation, whose government expects economic growth to slide to less than 2.5% this year, has avoided taking up a debt repayments standstill offered through a G-20 initiative to offer relief to poor nations as they battle the pandemic.

“It is still a good option, but it is not the best option, so we are still studying,” Yatani said.

$1 = 108.5500 Kenyan shillings Editing by Ed Osmond

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