How Kenya can avoid debt trap

Thursday December 7 2017

Madaraka Express

Madaraka Express arrives at the Mombasa Terminus in Miritini from Nairobi in July. The standard gauge railway is one of the Jubilee administration’s major projects. FILE PHOTO | NATION MEDIA GROUP 

Our economy is not in a crisis yet, but is headed there unless the Jubilee administration takes concrete steps to forestall an economic meltdown. It is not clear that the Jubilee administration is addressing the issues we face with the urgency that is required.

There have been some meetings between President Kenyatta and his economic team in the past few weeks, but the message from these meetings suggests it is business as usual.

Kenyans were hoping to hear Jubilee’s plans for credible fiscal and financial (banking sector) reforms, how we will address the debt trap we are about to get into and plans for dialogue between the private and public sectors on how best to prioritise dynamic constraints and identify practical solutions to the current economic challenges.

Instead, the discussions seem to be about how we shall continue in the current path of ‘economic transformation’ and how the Jubilee administration will address the promises it made during the recent political campaigns.

It looks like funding free primary education, universal health, mega projects and other things promised during the campaigns will be the priorities this second term. This, despite profit warnings by many listed companies that are likely to lead to less revenue for the government.

PILING DEBT

All indications are that we will continue to pile on debt to finance these plans.

The truth of the matter is that this is not sustainable.

Let the people in Jubilee’s inner circle not deceive or delude the President into believing otherwise.

The administration needs to go beyond the usual generalities and come up with concrete steps and well thought through action plans to save us from the looming debt crisis. Here are a few suggestions:

CAMPAIGN PROMISES

First, there is nothing sacrosanct about campaign promises.

Nation building cannot be accomplished overnight and the administration should not make haste to accomplish everything it promised in one breath even when the prevailing economic environment does not allow. Let these promises not turn out to be the long rope with which Jubilee will hang itself.

Second, our economic prospects depend on whether President Kenyatta can restore fiscal discipline.

This, and transparency will be needed to achieve macroeconomic stability, debt management and market credibility.

The recent rescheduling of part of commercial banks syndicated loans means we face a debt trap cycle that is triggered by pressure to refinance by the government; leading investors to demand higher interest rates, which then makes the country’s debt burden onerous.

BORROW TO PAY DEBTS

The government then has to borrow to pay its debts. When that cycle takes hold in a truly vicious way, the only ending is default. We have no choice but to curb the accumulation of new debt if we are to forestall a debt-induced economic crisis.

To do this, the government will need to achieve a sufficient primary fiscal surplus for at least the first three years of this term. Then work on improving macroeconomic conditions.

This will help reduce financing costs over the medium term. More taxation and revenue increases seem not to have induced debt reductions, so spending restraint is the right way to reduce the fiscal deficit and the debt. And the best way to cut spending is to downsize.

Reducing the burden of bureaucracy is the most effective way of lowering red ink. Do not worry about all the folks you promised jobs. The President’s legacy is more important.

Third, the government has to appreciate that it cannot do it all.

DIALOGUE

Growth, poverty reduction and other development goals could best be achieved through public-private dialogue. It should engage Kenya Private Sector Alliance (Kepsa) more, consult widely.

I do not think Kepsa and the private sector have been honest in their engagements with the government. Rather than engage in successful dialogue that would result in public private partnerships (PPPs) where private sector brings funding, skills, core competencies and best practices to assist government in delivering high standard of services and other public goods, some of the key private sector players have instead taken advantage of the government’s high appetite for borrowing and driven it deeper into the hole through inflated invoices. The President should demand more from the private sector.

Lastly, when a major sector of the economy like the banking industry is having a significant decline in profitability, it has major impact on the economy. The banks are exposed to many sectors of the economy; most of them have had their fingers burnt and have had to make major provisions for bad loans.

INTEREST RATES

I am sure it is now clear to the President and his advisers that capping interest rates was counterproductive.

Capping lending rates under the assumption that lenders will simply lower their highest rates while continuing to approve loans at the same rate was a pipe dream.

Parliament can cap rates but it cannot force lenders to approve loans.

The interest rate laws simply resulted in banks shutting out a sizeable consumer segment and in the process, credit to the real economy has dried up.

Pegging the lending and deposit rates to the Central Bank Rate was also not a clever idea.

BLUNT

That has rendered a key monetary policy tool blunt. Get rid of the rate cap.

We face serious economic and debt issues in the coming years.

From James Gichuru to Njeru Githae, 14 finance ministers including Mr Kenyatta borrowed Sh1.75 trillion in 50 years.

Jubilee’s one cabinet secretary borrowed Sh2.3 trillion in over four and a half years.

If we get into a debt crisis, all the fingers will be pointed at the Jubilee administration even though the almost Sh4.5 trillion national debt represents the running total of all deficits minus all surpluses, Jomo to Uhuru Kenyatta.

 

Mr Wehliye is a senior advisor to the Saudi Arabian Monetary Authority