How piling debt is taxing economy

When half of the money you expect to earn at the end of the month is equal to half your debt before factoring in food, rent and other essential expenses, then you are in dire straits.

And if you are required to repay the debt before the end of the month, it means to survive you have to borrow another loan, probably more expensive, ending up with an even larger burden. If this grim scenario describes you, then you look exactly like Kenya.

Kenya’s public debt has been robustly mounting and analysts predict that if nothing is changed to tame the seemingly boundless appetite for borrowing, the debt could soon reach impossibly astronomical levels.

Sample this; the debt, which makes up 90 per cent of mandatory spending by the national government technically called the Consolidated Fund Services (CFS), is almost a third of targeted tax collections — and that is if the Kenya Revenue Authority (KRA) meets its target.

In the current financial year, Kenya will have to cough up Sh466.5 billion in interest payments and principal against the Sh1.5 trillion target the government has given the taxman to raise.

The National Treasury will pay a record Sh250.8 billion in interest alone, which for the first time will be more than the Sh215.7 billion principal.
China and the International Development Association (IDA) alone will pocket more than Sh200.6 billion as loan interest from Kenya during the period.

Yet the staggering figures do not end there. Kenya will also pay Sh19.4 billion interest on proceeds from its $2.75 billion maiden international bond.

Although the question of whether the debt as it stands is sustainable or not is a matter economists cannot seem to agree on, it is evident that Finance Cabinet secretary is increasingly being pushed into a corner with very little room to wiggle.

This in itself is worrying as it points to difficult times ahead.

“The thing is that public debt has been growing dangerously fast to unsustainable levels,” says analyst Robert Shaw. “We are slowly sliding into a situation where we’ll have to borrow new loans in order to repay outstanding ones.”

Mr Shaw added: “I think we have come to a point where the CBK needs to ask the Treasury to adopt a conscious fiscal policy and go slow on borrowing because high level of debt could threaten the country’s monetary stability.”

Bloomberg last week reported economist Mark Bohlund warning that Kenya, which has a bigger domestic debt (57 per cent) held by commercial banks and fund managers charging high rates that mature over short periods, will be under immense pressure in repaying.

Kenya’s domestic debt market has no grace period, while the cost has remained exorbitant due to equally higher interest rates. The Treasury has in the past said growing preference for external debt is informed by cheaper or concessional terms with a grace period going beyond six years.

The largest share of foreign debt to Kenya is denominated in US dollars and euro (24 per cent and 15 per cent, respectively), with the Japanese yen accounting for 4 per cent.

This, however, depends on the shilling stability and fluctuations in global market conditions. For instance, Kenya would pay 8 per cent if it went for a Eurobond today, up from the 6 per cent when the country borrowed in 2014.

Debt servicing costs are rapidly increasing and are crowding out pro-poor spending. The government seems hellbent on spending resources it does not have with CS Rotich stating that he will need to borrow Sh700 billion to plug the deficit this year.

Last week the accountants’ body the Institute of Certified Public Accountants of Kenya (Icpak), joined the mounting chorus of caution to the Treasury warning that Kenya’s huge appetite for loans risks choking the economy.

Icpak chairman Fernandes Barasa said the loans should be used to finance development and not recurrent expenditure. “There is also need for public debt and obligations to be maintained at a sustainable level as approved by Parliament (for national government) and county assemblies (for county governments),” said Mr Barasa highlighting a widespread narrative by several critics.

Treasury and a section of experts have, however, discounted concerns that the country is treading on a dangerous debt zone, pointing out that Kenya’s sustainability analysis shows the country can even shoulder additional debt without compromising economic growth.

Based on hype

University of Nairobi economics lecturer Michael Chege says the talk of unsustainable is largely based on hype rather than “objective and informed reasoning”.

Nairobi-based analyst and chief executive of Rich Management Aly Khan Satchu says there is no cause for alarm yet. “The latest debt to GDP appears to be around 50 per cent. This is well within the normal distribution and significantly better than many in our peer group, especially those who have seen their currencies devalued and therefore their debt as a percentage of GDP expand exponentially,” said Mr Khan.

He, however, said the debt has to be used in productive sectors for the country to get value for it.

“Concern has been raised because of the trajectory of the increase in our debt. The point is if debt is used for investment and the investment returns outperform the cost of money, we will be in a good place. So much now depends on execution and the return on those investments,” he says.

Mr Rotich has often defended Treasury’s borrowing plans as necessary for the country’s development and growth. “Kenya has no surplus budget like the oil-rich economies and we have to shoulder the burden of building new airports and roads and the railway now if we are to grow in future,” he said.

President Uhuru Kenyatta’s government has been on a borrowing spree since coming to power in 2013. Foreign loans are funding major infrastructure projects as Kenya seeks to cement its status as a regional commercial hub.

The country is expanding its main airport, building a new railway that will eventually link Mombasa with Uganda, Tanzania and Rwanda, and revamping its roads as well as electricity network.

Controller of Budget Report says as at 30 September, 2015, the public debt stock stood at Sh2.94 trillion. This comprised Sh1.55 trillion as foreign debts and Sh1.39 trillion as domestic debts.  This means that Kenya’s public debt is rapidly increasing given that it was Sh1.72 trillion in September 2012.

Icpak warns that this is compounded by the fact that the Government is unable to generate enough revenue to meet its regular development expenditure.

The accountants agency is calling on Treasury to adopt guidelines of the IMF and World Bank Public on debt management, which focus on transparency and accountability.

“Real GDP growth must recover closer to its long term average projection of 6 per cent – still about 5-5.6 per cent.  For the overall public debt, sustainability could deteriorate if a significantly lower than anticipated growth thrives,” said Mr Barasa.