Kenya’s fiscal budget for 2019/2020 highlights twin objectives for trimming the budget deficit to manage ballooning public debt and prioritising fiscal allocations to the Big-Four plan, yet a critical look at the fiscal data indicates that the country is bound to face numerous challenges when executing the outlined development agendas. Specifically, analysis of the ratio of fiscal deficit-to-real GDP shows fairly high levels of between seven per cent and nine per cent for the last three financial years.
On the other hand, as at September 2019, Central Bank of Kenya data indicates that Kenya’s public debt stood at Sh5.9 trillion, which translates to a ratio of public debt-to-nominal GDP of above 50 per cent. In response, this has prompted the State to amend the Public Finance Management Act of 2012 that had initially set a debt ceiling of Sh6 trillion — to Sh9 trillion — to finance the country’s development needs.
Over the years, availability of foreign debt has enabled Kenya to increase its expenditure without radically raising additional tax revenue or enduring inflationary pressures. However, external borrowing can only be sustained for a limited amount of time. Lately, various lenders have put forth stringent lending conditions for the country. As a result, this has spurred domestic borrowing to finance the fiscal deficit. For instance, comparison of domestic borrowing in the months of September 2018 and September 2019 yields Sh2.5 trillion and Sh2.8 trillion, respectively, which translates to a growth of 0.3 trillion over the same period.
Presently, the country has reached a deadlock where the state is unable to cut down expenditure and increase tax revenue fast enough to cover the fiscal deficit. The total debt-to-GDP ratio is projected at 62 per cent by the end of 2020, which is a jump from 38 per cent in 2012. This is definitely a worrying trend because the level of borrowing has not translated to desired economic progress in the country.
The current state of the economy has generated a host of debates on whether Kenyans have the true picture of the debt levels in the country, and whether the State can effectively implement new and existing development programmes successfully.
Consequently, the government has made strides towards applying austerity measures aimed at curbing recurrent expenditure through various measures, such as flushing out ghost workers from the Integrated Payroll and Personnel Database and freezing employment in the public sector subject to approval from Public Service Commission.
However, the directive by the State to freeze employment is slightly ironic since the budget policy statement for 2019/2020 fiscal year is themed ‘Creating Jobs, Transforming Lives – Harnessing the Big Four’. In an ideal world, the public sector is a major contributor of employment to its citizens. Per the outlined measures by the State, the expectation is that the government should spend less.
However, it is surprising to note from the budget review that the State’s budget stood at Sh3.1 trillion for the 2019/2020 financial year and the debt-to-GDP ratio threshold has been shifted to 70 per cent, from 50 per cent.
So, what does this mean for Kenya’s economic development amid high unemployment, widening fiscal deficits and increased levels of debt? It is clear that the debt levels are not sustainable, and the country’s fiscal policy should be geared towards a level adequately below the ceiling to create fiscal space that can absorb adverse economic shocks. This is important for a country like Kenya that is often faced by unforeseen external and internal shocks, such as varying weather conditions, fluctuating exchange rates and incidences of insecurity.
It is also expedient for the country to spend borrowed funds wisely in order to generate employment and circulation of income in the economy. But recent trends indicate a high possibility that the debt ceiling will be reviewed again over the next medium term. If the government’s fiscal indiscipline continues, and this includes non-compliance to the PFM Act as outlined in various audit reports, the country will be unable to service its loans, and this could result in a major debt crisis.
We should review the case of Greece to avoid a similar fate for Kenya.
Ms Murugi Nguyu is an economics analyst. [email protected]