Kenya’s Sh700bn deficit pushes it deeper into debt

National Treasury Cabinet Secretary Henry Rotich reads the 2016/17 FY report at Parliament Buildings in Nairobi on June 8, 2016. Although he gave an assurance over the public debt in his speech, indicators point otherwise with taxpayers expected to carry a heavier debt burden for several years. PHOTO | JEFF ANGOTE | NATION MEDIA GROUP

What you need to know:

  • In the financial year ending this month, Kenya will have borrowed Sh462 billion, meaning higher interest payments, especially on the largely non-concessional Chinese loans.
  • International Budget Partnership (IBP) has criticised the ambitious borrowing with the promise of a narrowed deficit in the medium term.

The Sh700 billion deficit in the budget read on Wednesday will push Kenya deeper into the borrowing abyss, with the revenue collector likely to miss raised targets of Sh1.5 trillion in the 2016/17 financial year.

Although Treasury Cabinet Secretary Henry Rotich gave an assurance over the public debt in his speech, indicators point otherwise with taxpayers expected to carry a heavier debt burden for several years.

“Going forward, Mr Speaker, we remain committed to bringing the fiscal deficit down gradually to below 4 per cent of GDP in the medium term,” Mr Rotich told Parliament. “This reduction should strengthen our debt sustainability position.

“In this context, Mr Speaker, allow me to assure this honourable House that Kenya’s public debt remains sustainable. We have been careful to maintain our external and domestic debt well within our capacity to service the same.”

In the financial year ending this month, Kenya will have borrowed Sh462 billion, meaning higher interest payments, especially on the largely non-concessional Chinese loans.

The National Treasury will pay a record Sh250.8 billion in interest alone in the 2016/17 financial year, which is more than the Sh215.7 billion principal.

The repayment of interest on existing debt is worryingly in excess of the repayment of principal by 16.2 per cent. 

China and the International Development Association (IDA) alone will earn more than Sh200.6 billion as loan interest from Kenya in the year.

Public debt, which commands the consolidated fund services (mandatory spending by the national government by 90 per cent), will drive the spending of at least a third of targeted tax collections, assuming Kenya Revenue Authority (KRA) meets its target.

International Budget Partnership (IBP), a nonprofit that promotes awareness on government spending in various countries, has criticised the ambitious borrowing with the promise of a narrowed deficit in the medium term.

IBP Country Director Jason Lakin said the Budget repeated the optimism that things will be better in the medium term even as the past showed otherwise.

“We had been told that there will always be a turnaround in the medium term, which is rarely the case, and since Kenya has borrowed much from China, the external debt burden is bound to rise,” Mr Lakin said.

“However, the overall picture is that there is bound to be some relief next year on the interest burden.”

Kenya will also pay Sh19.4 billion interest on proceeds of its $2.75 billion maiden international bond floated in June and November 2014.

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. Kenya shilling-denominated debt accounts for 57 per cent.