Kenya's Debt Problem Creates Bleak Future

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Debt.

For every Sh100 Kenya is collecting in tax revenue, it is spending Sh130 to fund its budget needs, an overspending that is driving its voracious debt appetite to plug the shortfall.

An analysis of the most recent expenditure data published by the Central Bank of Kenya (CBK) shows that Kenya has been spending at least 1.3 times more than its total revenue in the 12 months to August 2018.

This explains the dependency that the Jubilee administration now has on debt.

President Uhuru Kenyatta inherited a public debt of Sh1.7 trillion in March 2013 from the Mwai Kibaki regime.

He has since grown this debt by threefold in the last five years to Sh5.1 trillion as at September last year.

If this debt was to be shared among all citizens equally, it means that every Kenyan owes about Sh100,000.

The increase of Sh3.4 trillion between 2013 and 2018 translates to a borrowing of about Sh600 billion every year or Sh50 billion every month. This is the fastest accumulation of debt in Kenya's history.

DEVOLUTION

President Kenyatta's predecessor was more conservative in his approach to debt having taken charge of the country when its public debt was at Sh629 billion.

In 10 years, Mr Kibaki, an economist, grew this debt 2.8 times to Sh1.7 trillion. This translates to about Sh115 billion every year, a far cry from the Sh600 billion a year under the current regime.

Though in accounting practice, the concept of time value of money discourages comparisons of absolute figures since money loses value over time.

But even with factoring in this loss of value over time, the Jubilee administration still keeps the trophy and wins by a staggering margin.

Devolution has also created a new cost centre, which has seen the government set aside more than Sh300 billion every year to fund the devolved units, further worsening the cash flow crisis of the national government.

The fact that the tax collections have also been growing at a slower pace than the growth in expenditure has only made a bad situation worse.

This has left the National Treasury under Mr Henry Rotich with fewer options than to borrow, despite a public uproar.

BUDGET DEFICIT

Treasury however maintains it is still in charge of the situation and there is nothing to worry about on the debt situation. And it has numbers to back this position.

Treasury Principal Secretary Kamau Thugge says the government has been narrowing down its budget deficit to reduce its need for borrowing as a percentage of the Gross Domestic Product (GDP).

"The fiscal deficit has narrowed from about nine per cent of GDP in 2016/17 to 7.2 per cent in 2017/18 and an estimated 6.8 per cent this year. The budget submitted to parliament in April reduces this further to 5.6 per cent," Mr Thugge said.

"The government is also diversifying its source of funding so as not to rely only on bilateral and multilateral borrowing," Mr Thugge told the Nation in a message.

But a number of experts and players in the financial sector do not think all is well

The Central Bank, which is the government's banker, the International Monetary Fund (IMF), the Parliamentary Budget Office (PBO), the Institute of Certified Public Accountants of Kenya (ICPAK) and the Institute of Economic Affairs seem to be reading from a different script from that of the National Treasury.

DEBT RISK

At different times and with varied levels of concern, they all say Kenya's debt position is getting to dangerous levels and the country must ease pressure on the debt pedal and engage a lower gear before it is too late.

They also have numbers to back their position. "As advisers of the government, our point is this is the time to begin working on reorganising our debt, not in a frantic way. Doing it the Eliud Kipchoge way, which is a marathon, and you have to do it in a steady way," CBK Governor Patrick Njoroge told reporters this week.

"It is important to say that the moment for dealing with debt reorganisation has come," the CBK boss said.

The IMF was among the first institutions to raise the red flag when it raised Kenya's debt risk from low to moderate last year, citing the increasing refinancing risks and tighter safety margins

"The higher level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly one-fifth of revenue, placing Kenya in the top quartile among its peers," IMF said in its review.

ACCOUNTABILITY

Politicians and former finance bosses have also weighed in on the matter.

Amani leader Musalia Mudavadi, who has been the most consistent critic on the debt spree, this week asked the government to first account for the billions it has borrowed and also show development projects that have been put up with the borrowed funds.

"How long will this reckless borrowing without accountability go on? The Jubilee government and their partners must now tell Kenyans the true level of their country's indebtedness and the detailed terms and conditions around each debt. Kenyans have a right to know," Mudavadi said.

The Jubilee administration has made the Eurobond one of its most preferred ways of raising money from the international markets.

In the last five years, some Sh692 billion have been raised through this route, with the latest issue happening last month where it raised Sh210 billion.

The inaugural Eurobond was in June 2014 where a total of Sh280 billion was borrowed in five and 10-year tranches.

PRIORITY

The government went back for another Eurobond last year where it netted Sh202 billion in 10 and 30-year tranches.

Treasury recognises however that public expenditure pressures and poor revenue collections are some of the immediate risks it must deal with.

"Some of the fiscal risks include public expenditure pressures coupled by revenue underperformance which could make it difficult for the government to actualise and sustain macroeconomic policies detailed in this BPS," Treasury says in its current Budget Policy Statement.

"Other fiscal risks include shocks to exchange rates which could impact the size of debt servicing," Treasury says in the document that lays the foundation for its spending plans for the following financial year.

Though debt is not necessarily a bad thing, how it is used and its cost determines how risky it is.

Repayment of debt also comes tops among the government's expenditure priorities and this leaves lesser resources to do development.

Available data shows that debt repayments took up nearly Sh635.35 billion in 10 months through April, 2019.

REPAYMENTS

Treasury plans to spend nearly Sh870.62 billion on debt obligations by the end of this financial year in June 2019, meaning additional Sh235.27 billion is falling due this month and June.

That includes Sh93.76 billion towards the debut five-year Sh75.83 billion which matures in June.

The statistics show the cash spent on servicing public debt was three times the expenditure on development projects in the same period.

In the coming financial year, the highest interest payments will be due to the Exim Bank of China, at Sh37.8 billion. This will be followed by a syndicated loan from the Trade and Development Bank at Sh17.1 billion.

The 2018 international sovereign bond will attract Sh16.6 billion in interest payments while new loans will gobble up Sh40.4 billion in 2019/20, up from Sh18 billion this year.

But borrowing is not going to stop. Treasury says the government is trying to look for alternative sources of finance to deal with revenue shortfalls and keep its debt under check.

CAPITAL MARKETS

It says it intends to explore other sources of possible financing such as the Islamic financing instruments, green bonds, Samurai and Panda bonds and diaspora bonds over the medium term.

"The government will continue to diversify the sources of financing over the medium term by maintaining a presence in the international capital markets," Mr Rotich says in the new budget documents.

Samurai bonds are yen-denominated usually issued in Tokyo by non-Japanese companies.

These bonds are subject to Japanese regulations. On their part, Panda bonds are Chinese renminbi-denominated designed to allow borrowers to tap into China's large investor base.

Kenya has been increasingly turning to China for debts to fund its infrastructure projects and this has seen China upstage Western countries to become the country's biggest lender.

DEFAULT

ICPAK recently urged the government to keep an eye on the red flags and warning indicators to ensure that the country is not caught-up in a debt crisis in the near future.

"The institute is of the opinion that we must strive to negotiate debt at concessionary terms covering both the cost and tenure of resulting debt," chairman Julius Mwatu said.

On the other hand, the Institute of Economic Affairs (IEA) warns that Kenya risks defaulting on its debt obligations in a decade if the current appetite for borrowing remains unchecked.

The IEA says that Kenya has been borrowing from China, whose loan terms are harsh and which does not do due diligence studies before issuing loans, as opposed to Western countries, which are strict on how a country governs itself before approving lending.

"Loans from China accrue more interest and require a shorter time to service as opposed to bodies such as the World Bank or the International Monetary Fund," IEA's John Mutua noted.

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