Despite fresh IMF support, government finances remain under strain after the Kenya Revenue Authority (KRA) reported smaller than targeted revenue collection for the first half of the fiscal year (starting July 1st), while the pressure to spend-including on drought relief and establishing new constitutional organs-continues to rise. As a result, borrowing is climbing, especially from the domestic market, which could put pressure on interest rates and squeeze out the private sector. Revenue collection in July to December 2010 amounted to KSh303bn (US$3.8bn). Faster real GDP growth has boosted the overall tax take but a fierce price war between telecoms operators has dented flows from airtime taxes, making it hard for the KRA to meet its targets.

The government has continued to rack up domestic borrowing via the issue of new bills and bonds. The latest data show that domestic debt reached a new peak of KSh720bn at the end of 2010-22% higher than a year earlier and up by KSh60bn since the start of the fiscal year. The government had planned to borrow KSh105bn from domestic markets in 2010/11, but will now require closer to KSh120bn (4.4% of GDP). Total domestic debt now accounts for about 30% of GDP-and foreign debt for a further 22% of GDP-pushing the overall public debt burden to 52% of GDP. This is tolerable in a global context but the figure is likely to rise further in the near term and is well ahead of the government's medium-term target of 40% of GDP: the ECF aims to cut the burden to 45% of GDP within three years. On the plus side, Kenya lengthened the maturity profile of its domestic debt in 2010, lifting the ratio of bonds to bills from 75% to 80%. To help to meet the government's ravenous debt appetite, the Central Bank of Kenya (CBK) announced a new auction schedule in January 2011, increasing the frequency of 91-day Treasury-bill auctions to weekly (from fortnightly) and 364-day T-bills to monthly (from two-monthly). The Treasury has also extended tax concessions for bond issues geared towards infrastructure projects.

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