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Kenya, Uganda spending plans may fuel deficit fears Add to ...

Government spending across East Africa is set to balloon this year as Kenya and Uganda pursue expansionary, pro-growth budgets, putting continued pressure on domestic borrowing and forcing up already lofty bond yields.

The largesse is also likely to erode support for the Kenyan and Uganda shillings, both of which have hit record lows against the dollar this year amid signs of a lukewarm commitment to tackling double-digit inflation.

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In his 2011/12 budget, Kenyan Finance Minister Uhuru Kenyatta outlined spending of 1.155 Kenyan shillings ($13.3-billion U.S.), a 15 per cent increase on last year's budget that is likely to push the deficit out to 7.4 per cent of GDP.

By contrast, in his 2010/11 budget, Mr. Kenyatta forecast a funding gap of 6.8 per cent of output that still had analysts fretting about stimulating domestic inflation and putting pressure on local borrowing.

Mr. Kenyatta forecast growth of 5.3 per cent for the year for the region's biggest economy.

Sharply rising inflation has caused Kenyan bond yields to spike sharply higher over the last year, with 3-year bond yielding nearly 11.5 per cent in the run-up to the budget.

The double-digit interest rate has intensified concerns about how the government will finance its ambitions, but Mr. Kenyatta said he was not unduly worried about increased borrowing costs.

"We do not expect short-term interest rates to rise drastically, but care will be taken to ensure credit to support economic productivity," he said in his budget address, delivered at the same time as other East African nations.

In Kampala, the government unveiled similarly ambitious proposals amid a goal by long-term President Yoweri Museveni to turn Uganda into a middle-income country by 2015. Despite the recent discovery of oil, analysts dismiss the goal as unrealistic.

Newly appointed Finance Minister Maria Kiwanuka Uganda said the economy would grow 7 per cent in financial 2011/12, while inflation, which hit 16 per cent in May, its highest level since 1994, would drop back to just 5 per cent over the next 12 months.

She said domestic revenues would finance 71 per cent of the government's spending plans, with "external financing" - basically foreign aid - accounting for the remaining 29 per cent, the same proportion as last year.

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