Households hit by Kenya’s accumulating big burdens

Nyeri market

Kenyans buy foodstuffs in Nyeri town. Runaway fuel prices are expected to have a ripple effect on households with an expected surge in prices of essential commodities.

Photo credit: Joseph Kanyi | Nation Media Group

Kenya is fast accumulating big-ticket burdens whose impact on the economy has hit even the poorest of households, as loads valued at more than Sh1 trillion in a single year grow.

The burdens now constitute the public service wage bill, public debt service and trade deficits, each being beyond Sh1 trillion.

The effects cut across the economy and can be felt in aspects as simple as buying a kilogramme of flour or sugar, a loaf of bread, a packet of milk or travelling in a matatu.

A combination of factors, including loss of the local currency value and a rise in prices of basic items permeates the effects to every family.

An analysis of data on the three key indicators shows that while spending on debt service and public wage bill have grown by 88 to 359 per cent in the last decade, the country’s trade deficit has equally widened by 89 per cent since 2016.

The public wage bill – the amount the government spends on its employees’ salaries and wages – has grown from Sh622.2 billion in 2016 to Sh1.1 trillion in this year.

It is expected to grow to Sh1.17 trillion in the current financial year ending June 2024.

This will be an 88.2 per cent growth in just nine years. It will see the government utilise about 45 per cent of taxes it collects on salaries alone.

Mr Ken Gichinga, the Chief Economist at Mentoria Economics, says the pursuit of an expansive government by successive regimes has led to the challenges being witnessed today.

He adds that it is a deviation from an objective the country set for itself close to four decades ago, “when we committed to establishing Kenya as a market economy”.

“The huge public service wage bill points to the effects of running an expansive government. Despite Kenya being a market economy as was envisioned in Session Paper Number 1 of 1987, the economy is still dominated by public sector spending,” Mr Gichinga says.

Spending on public debt service is projected to hit Sh1.8 trillion in the 2023/24 fiscal year, according to the National Treasury, a 359 per cent growth from Sh393 billion spent in the 2014/15 financial year.

In the 2022/23 financial year, whose figures are yet to be published, the government was expected to spend Sh1.38 trillion on servicing debt.

It had already spent Sh831 billion in the nine months to March this year, an amount almost equal to the Sh847 billion spent in the entire 2021/22 fiscal year..

Spending on public service wage bill crossed the Sh1 trillion mark in the 2021/22 financial year, while on public debt service will be crossing in 2022/23 or 2023/24 fiscal year when huge debts – including the $2 billion Eurobond borrowed about a decade ago – mature.

The burden of interest payment is also growing fast, with Sh684.5 billion out of the Sh831 billion spent on servicing public debt between July 2022 and March 2023 being on interest.

The National Treasury projects that interest payments will be Sh891 billion by 2027, about Sh100 billion shy of a trillion.

“Running an expansive government often results in budget deficits and a rise in public debt. This, in turn, leads to high interest rates and a crowding out of the private sector,” Mr Gichinga says.

“A high interest rate regime leads to lower productivity. This forces the country to import more, leading to a huge trade deficit.”

Economists, academics and professional institutions say the ballooning burdens to the economy and government are detrimental to Kenya’s growth.

The burdens stifle development resources and add hit households hard.

On the other hand, the economy has been doing poorly, with an unhealthily heavy reliance on imports compared to exports to see the trade deficit hit Sh1.6 trillion by last year, an 89 per cent rise in the deficit since 2016.

“The volume of trade increased by 17.5 per cent from Sh2.86 trillion in 2021 to Sh3.36 trillion in 2022. The improvement was on account of an increase in total exports and imports by 17.4 and 17.5 per cent, respectively,” the Kenya National Bureau of Statistics (KNBS) says in its report.

In the 2023 Economic Survey, the KNBS further notes, imports continue to grow at a faster rate than exports, making the trade deficit worse.

Negative impacts

Deficit is the difference in value of goods the country exports and those it imports.

Trade deficit moved from Sh1.37 trillion in 2021 to Sh1.62 trillion last year.

Trade deficits have had negative impacts on the stability of the shilling, as the value of goods Kenya needs from other parts of the world is far more than the value of what the country sells abroad.

When our demand for the dollar to purchase imports is higher than our possession of it – primarily coming in through the sale of our goods outside – the shilling loses value.

The local currency has shed 18.4 per cent of its value against the American dollar since January, from exchanging at 123.42 units to 146.135 by Friday, according to the Central Bank of Kenya.

In a May report unpacking the 2023/24 fiscal year budget, the Parliamentary Budget Office said the depreciation of the shilling against the dollar resulted in a reduction of forex reserves, below the statutory four months of import cover and increased the risk of debt distress.

“The 2023/24 financial year budget, therefore, faces the unenviable task of rebalancing the economy by implementing corrective policies aimed at addressing debt vulnerabilities while at the same time using available fiscal space to implement structural policies that will boost investment and economic productivity,” the report by the Parliamentary Budget Office says.

“Further, the response to inflation by domestic and foreign monetary authorities may result in higher expenditure on debt servicing during the first half of the 2023/24 financial year.”

The high public wage bill, which is a big reason for the budget deficits that result huge borrowing, has been blamed on reckless hiring in the public service, where corruption and a high number of phantom employees have taken root.

This, experts say, affects the country’s economy indirectly by denying resources to developments that can boost exports.

National Assembly Budget Committee Chairman, Ndindi Nyoro, admits that the government can perform optimally with 70 per cent of its current workforce of 963,200 – the figure for the 2021/22 financial year.

“Looking at the salary figures, not just for Kenya but across Africa, we could offer the same service probably with 70 per cent of the workforce,” Mr Nyoro said during an Auditor-General’s event this week.

Debt service

The Controller of Budget says the huge public debt service demands are affecting public services across national and county governments, with constant delays in the release of funds from the National Treasury.

Some Sh70 out of every Sh100 collected by the Kenya Revenue Authority (KRA) from Kenyans goes into settling the country’s debts.

“Most of the revenue we collect goes towards public debt settlement. We set aside up to 70 per cent of the collections to repay debts. That leaves the National Treasury with just 30 per cent to give to devolved governments and handle recurrent and development expenses at the national level. It is becoming untenable,” says Controller of Budget Margaret Nyakang’o.

University of Nairobi lecturer, Samuel Nyandemo, says such huge spending on areas that do not catalyse economic performance when Kenya’s economy is considered fragile is risky, and points to a government living beyond its means.

“The wage bill problem needs to be addressed through cleaning of payrolls to remove ghosts and by the government hiring on contract where necessary,” Dr Nyandemo says.

“We should also remember that this has been compounded by high levels of corruption. We must work towards good solutions.”

The university lecturer adds that the three key issues are intertwined and must be addressed while working to grow the country’s revenue and exports, “lest other burdens sprout from the inaction”.

“Our exports are not favourable when compared with imports because most of what we are selling abroad is not value-added. This leads to low revenue,” Dr Nyandemo said.

“With this, we end up importing more than we sell outside. The shilling is losing value because our dollar demands keep rising.”