The Parliamentary Budget Office (PBO) has advised the National Treasury to reschedule payments of domestic debts to ease the burden on taxpayers, as expenditure on loan repayments crosses the Sh1 trillion mark in the coming financial year.
Projections by PBO, which is mandated to independently scrutinise Treasury’s expenditure plans, indicate Kenya will borrow Sh1.1 trillion in the current financial year, raising the total public debt to Sh8.8 trillion by June 2022.
Debt servicing costs will rise sharply to Sh1.36 trillion (10 per cent of the country’s Gross Domestic Product (GDP) in the 2022/23 financial year, a 77 per cent growth from the Sh765.9 billion spent by the government servicing loans in 2020/21 as per the PBO’s estimates.
The budget office has cautioned that the growing debt is pushing the country to the brink. To make matters worse, PBO warns that revenues are projected to fall short of Treasury projections, by up to Sh107 billion, piling the pressure on government to plug the gap through borrowing.
“The debt stock is established to have increased by 15 per cent from FY [Financial Year] 2019/20. This leaves only four percent or Sh1.29 trillion to finance the Sh929.7 billion fiscal deficit for FY 2020/21 and FY 2022/23 (estimated to range between Sh775.8 billion and Sh940 billion).”
“Given the prevailing debt accumulation and debt service trends, the current debt ceiling cannot hold. Therefore, it may be subject for review in order to accommodate any further borrowing to fund expenditure requirements,” states the PBO report.
PBO argues that budget deficits, which have increased due to missed revenue targets by Treasury, will leave the government with little options but borrow to finance the budgets, which will worsen the situation.
By June 2021, Kenya’s debt as a percentage of GDP was 68, which PBO projects will hit 70, by June 2023. The office has advised the government to restructure domestic debt, which accounts for 74 per cent of debt service charges, if the country is to reduce the current burden.
“Notably, debt service, which is a mandatory expense, is estimated to account for over 60 per cent of ordinary revenue in the medium term, thereby reducing resources available for other critical expenditures,” PBO states, noting that total debt service could increase by 16 per cent, to hit Sh1.36 trillion by June 2023.
Sounding more pain to Kenya’s fiscal space, the PBO report has revised down revenue projections by the National Treasury from Sh1.775 trillion in the current FY to at least Sh1.668 trillion, meaning that the projected budget deficit is likely to expand and raise borrowing.
The PBO bases its projections on slow recovery of tax revenue in relation to GDP growth and possible subdued investment in 2022 being an election year, estimating that, even in the 2022/23 financial year, Treasury’s ordinary revenue projection of Sh2.141 could fall short by up to Sh366 billion, or collect the figure it projects to collect this year.
In light of the fiscal pressures facing the country ahead, PBO has made drastic proposals to the government, including considering de-listing products outside agriculture, that are currently enjoying zero-rated status for Value Added Tax (VAT).