Save our dear country from deep debt hole

Public debt

Kenya's debt crisis has been cooking since the Jubilee administration took charge.

Photo credit: File

The current level of Kenya’s debt was already worrying before it was exacerbated by the weak economic fundamentals attributable to the effects of the Covid-19 pandemic, which has ravaged the world since early last year.

The country’s debt composition has evolved. The government increased foreign debt to Sh3.7 trillion and domestic debt to Sh3.5 trillion as at September 2020.

The nine months following the first case of Covid-19 in the country last March have seen public debt rise to new levels, driven by several factors.

These include, but are not limited to, reduction in government revenue for the first quarter of FY2020/21; Parliament’s approval of a proposal by the National Treasury in October 2019 to raise the national debt ceiling to an absolute figure of Sh9 trillion from the previous limit of 50 per cent of gross domestic product (GDP); and continued servicing of dollar-denominated commercial loans and Eurobonds, despite a weakening shilling.

A significant amount of government spending has gone into development projects, whose expected economic return might not be able to finance the cost of the debts.

For example, the Exim Bank of China is set to receive debt payments for the standard gauge railway (SGR) in the current fiscal year, despite the project facing a variety of challenges like low cargo volumes and revenue shortfalls.

In the period from January to May 2020, for instance, the SGR recorded revenues of Sh4.9 billion against operation costs of Sh7.3 billion, representing a loss of Sh2.4 billion. This means that, instead of the high-cost project contributing to its debt servicing, the burden falls entirely on the taxpayer — an indication that a significant part of debt is not translating into economic growth.

Feasibility tests

I strongly suggest that feasibility tests always be done before embarking on mega infrastructure projects. That will help to ascertain their economic rate of return to ensure that the economic benefits outweigh the cost and the ripple effects of the projects will provide an enabling economic environment to facilitate servicing the debt instead of saddling the taxpayer with the burden.

The government was even considering taking the G-20’s Debt Service Suspension Initiative route, which would see the country benefit from up to Sh75 billion in suspended debt service obligations.

But suspending debt obligations would not solve the problem. Instead, it would exacerbate it by increasing servicing pressure once the suspension period is over.

This is because the government will then have to service more expensive commercial loans in addition to the suspended obligations.

I urge the government to quickly come up with better ways of solving the public debt problem before it’s too late to save the nation from collapse.

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