29 August 2017

Kenya: Huge Debt Aside, Economy Will Grow, Say Experts

The Kenyan economy is expected to sustain growth irrespective of the outcome of a presidential election results petition in the Supreme Court.

Experts, however, are of the view that the incoming administration must address the issue of mounting government debt, review interest rate cap law, and ease of doing business among other economic matters to boost expansion.

Over the past years, the country's national budget has been growing with the total expenditures expanding at an average of 14.7 per cent to Sh2.2 trillion in 2016/2017 from Sh977 billion in 2010/2011 fiscal year.

According to the Kenya Revenue Authority (KRA) tax collection has increased by 12.7 per cent to Sh1.4 trillion in 2016/2017 from Sh670 billion in 2010/2011.

This implies that the difference has been funded through borrowing.

This has led to an increase in the debt level from 40.7 per cent debt to GDP in 2011 to the current level of 54.4 per cent, which is 440 bps (basis points) above IMF's threshold for developing countries.

Investment firm, Cytonn Investment Public Limited Company (Plc) in a weekly research report said the government should strive to manage the country's debt levels going forward.

This is by enhancing tax revenue collection growth, which can be achieved by developing avenues that will allow the informal sector to be brought in and enforcing efficient cash netting methods such as requiring the use of iTax for remittances.

"Involve private sector in development through public-private partnerships (PPPs) so that private funding reduces the need for public borrowing and also private funding enhances the self-sustainability of a project."

"And, reduction of recurrent expenditure that currently accounts for 58.8 per cent of the 2017/2018 budget, compared to 54.3 per cent in 2016/2017 and 50.8 per cent in 2015/2016," the investment firm research team said.

The increase in debt levels has been driven by slow growth in revenue collection compared to that of the budget. Revenue collection has grown by an average of 12.7 per cent compared to the 14.7 per cent expansion in the budget.

Also, significant investment in infrastructure projects such as Standard Gauge Railway (SGR) which are mainly financed through external borrowing have led to increase in debt.

Similarly, review of the interest rate cap has dominated the financial sector for a while now since its introduction in September last year.

Even though critics have accused banks of engaging in 'blackmail and economic sabotage to force amendments' to the capping law, financial analysts have been arguing that the ceiling is yet to achieve the desired effect.

They said this is by locking out small and medium sized enterprises and retail borrowers from accessing credit.

The new law has also been accused of leading to widespread restructuring and lay-offs in the banking sector.

Strained small banks which have to mobilise expensive funds and can only lend out within the stipulated margins, continue to weigh down on private sector credit growth which stood at 2.1 per cent as at May 2017, the lowest in eight-years from a high of 17 per cent in 2016.

"It is clear from the above that the effects of interest rate capping are more disastrous than productive with the cons far out-weighing the pros. While we are of the view that rate caps ought to be scrapped or at least radically reviewed, the review ought to be coupled with legislation that will make funding markets more competitive," read the Cytonn report.

It suggests that policy makers should instead put in place enabling regulation for the development of innovative and competing alternative sources of funding in order to bring down the 95 per cent funding dominance by banks as compared to more developed markets where banks funding accounts for only 40 per cent of total funding.

It also notes that there is need to spur innovation and growth of alternative and capital markets funding and provide fundamental and strong consumer protections for Kenyan public and push more information sharing by banks.

The government has also been urged to diversify the economy.

This is by supporting the manufacturing sector through development of infrastructure such rail, upgrade of airports, roads and real estate.

For real estate, this can be done through legislative steps that will ease approvals for plans and improve access to credit to both firms and homeowners through mortgages in order to better their contribution to the GDP.

The experts point out that through diversification of the economy , more jobs will be created and the risk the economy is exposed to due to climate changes, reduced.

And with the enhanced ease of doing business, the country will provide an attractive destination for foreign investors increasing the country's foreign direct investments.


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