Kenya’s debt repayment headache growing daily

Experts warn that Kenya must go slow on borrowing even as avenues for financing the budget get slim with the Covid-19 menace.

Photo credit: Pool

What you need to know:

  • According to the 2020 Budget Policy Statement (BPS), the National Treasury has indicated that all additional resources in 2020/21 will be taken up by debt servicing and pensions.
  • With the expected dip in revenue collection caused by the global Covid-19 pandemic, the country is staring at difficult times ahead.
  • In 2019, Parliament amended the PFM regulations completely shifting the threshold away from a base of GDP to a new limit based on an absolute figure of Sh9 trillion by June 2024.
  • According to Mr Rugo, these measures include standards on debt that are commonly considered global good practice.

Budget experts are now warn that Kenya risks surpassing its Sh9 trillion budget ceiling in the coming years as it continues to borrow heavily to finance the ever-ballooning budget deficits.

With at least Sh1 trillion, the gaping hole in the Sh2.79 trillion budget for the 2020/21 financial year, it means that the country will have to borrow heavily from local and foreign markets to finance it.

The International Budget Partnership (IBP) in its state of Kenya’s public debt paper; the thin line between a rock and a hard place, notes that the government has to find ways to reduce the country’s debt repayment burden by restructuring some of its loans.

“The country has to reduce commercial borrowing that has been more expensive and with shorter maturity periods,” Mr John Kinuthia and Mr Abraham Rugo, joint managing partners at the IBP, warn in their October 2020 paper.

This comes as Kenya’s debt repayment bill grows rapidly with the increasing proportion of ordinary revenue absorbed by debt becoming a serious threat to the country’s critical service provision areas.

According to the 2020 Budget Policy Statement (BPS), the National Treasury has indicated that all additional resources in 2020/21 will be taken up by debt servicing and pensions.

Struggling SMEs

In the current financial year, the country is required to repay Sh904 billion in interest accrued from the public debt, which stands at Sh6.7 trillion as at the end of June 2020.

The public debt figure is equivalent to about 66 percent of the Gross Domestic Product (GDP).

With the expected dip in revenue collection caused by the global Covid-19 pandemic, the country is staring at difficult times ahead.

Struggling Small and Medium-sized Enterprises (SMEs) have not helped the situation.

The grim reality is that although the National Treasury had projected Kenya Revenue Authority (KRA) to collect Sh1.8 trillion in taxes, the target was revised to Sh1.62 trillion due to the Covid-19 effects.

But with the pandemic still biting, it is unlikely that the taxman will meet the set target.

But despite this expected shortfall, the country still has to spend Sh1.89 trillion to finance recurrent and development expenditures.

Ability to repay its debts

This includes Sh1.25 trillion on salaries and allowances of government employees and Sh637.64 billion for development expenditure during this financial year.

This implies that the only way out of the huge deficit is more borrowing from the local and external market.

“A country must engage in business that generates foreign exchange so that it is able to settle its foreign currency-based debt. Low export business in a country relative to what it owes could create a debt repayment problem for the country,” Mr Kinuthia says.

Before the shift to an absolute figure of Sh9 trillion, the total public debt to GDP ratio was an indicator used to measure a country’s ability to repay its debts.

This describes the proportion of a country’s public debt relative to its total economic output.

Until the change, it had not been clear the threshold that mandarins at the National Treasury were applying.

This is despite the Public Finance Management (National Government) Regulations setting the limit at 50 percent of the GDP.

Funds from global bond markets

But even as this was the case, the Budget Review and Outlook Papers from the National Treasury set the upper threshold for Kenya at 74 percent in the 2017 edition before changing to 55 percent of the country’s GDP.

In 2019, Parliament amended the PFM regulations completely shifting the threshold away from a base of GDP to a new limit based on an absolute figure of Sh9 trillion by June 2024.

Since 2014, when Kenya floated its first Sovereign bond and began its negotiations for a loan from the Exim Bank of China to finance the standard gauge railway, the size of the public debt has become a key issue of debate in the country.

During this period, Kenya has also been able to raise funds from global bond markets easily and attain infrastructure funding from other countries as well.

“Increasingly, the risk of Kenya breaching the debt sustainability measures that it is a signatory to, such as the East Africa Economic Convergence Criteria which set debt ceilings for the region, has dominated discussions on fiscal consolidation even as the government pursues an expansionary budget framework,” Mr Rugo says.

According to Mr Rugo, these measures include standards on debt that are commonly considered global good practice.

“They provide a sense of a country’s ability to repay its loans without adversely affecting other budget obligations especially those related to the delivery of basic and essential services,” he says.

dmwere@ke.nationmedia.com