Kenya’s total debt ceiling of Sh9.1 trillion which represents about 60 per cent of the Gross Domestic Product (GDP) is expected to hit Sh10 trillion.
This debt includes Sh4.7 trillion in external debts while Sh4.4 trillion is domestic debt.
Part of this debt matured in 2023 and due to the depreciating currency, the debt repayments increased in Kenya shilling.
Subsequently, this put more pressure on the government to raise additional revenue to plug in the deficit occasioned by the currency depreciation.
The increased debt ceiling might see the financial sector stability and development experience turbulence as the Kenya Kwanza government starts its economic transformation journey.
President William Ruto’s projected Sh3.7 trillion budget plans to allocate resources to its priority projects in 2023/2024 budget dubbed: “Bottom-up Economic Transformation and Climate Change Mitigation/Adaptation for Improved Livelihoods of Kenyans.”
The projects based on the Kenya Kwanza manifesto include Agricultural transformation, Micro, Small, and Medium Enterprises (MSMEs), Housing and settlement, Healthcare and Digital superhighway, and creative industry.
According to an analysis by Audit, Tax, and Advisory services firm KPMG, the expectation was that the government would have made the bold decision to lower the budget to reduce the debt stress.
“This is however not the case and while the debt-to-GDP ratio is expected to reduce, the absolute debt numbers will increase. The government is now expected to exceed the debt ceiling of Sh10 trillion unless the ceiling is increased,” said KPMG in a detailed blow-to-blow analysis of the Ruto budget.
The audit firm says while these are early days, the government will ultimately be judged based on how well it implements the budget and creates the opportunities it has promised.
The analysis comes in the wake of heated public discussions on the Finance Bill, 2023 which according to KPMG has “demonstrated a trust deficit between the people and government and it will need [government] to work a lot harder to regain the trust.”
KPMG in its analysis observes that there has been intense focus on the country’s debt position with fears that it will struggle to meet its commitments as they come due.
At the same time, the audit firm noted that the budget does not include funding for the principal debt repayments that are expected to come due which would push the funding requirements in the coming year to Sh4.4 trillion.
“Borrowing is expected at Sh1.5 trillion. Based on the borrowing projections for the coming year, the government expected to shift its policy of borrowing from foreign markets to avoid crowding the domestic markets. In the coming year, the foreign markets are now expected to contribute only 18 per cent of total borrowing,” said KPMG statement.
The debt servicing is also expected to increase with the government increasingly borrowing at significantly higher interest rates.
The latest figures from the Central Bank of Kenya (CBK) on bonds auction indicate investors of government bonds are earning 15 per cent interest.
However, KPMG hints that the debt stress over the coming year will be intense and the government will have a tough balancing act to meet the expected repayments while still funding its priority programs.
“In such cases, the development budget is likely to suffer,” says KPMG.
On the introduction of export levy on a select list of products in a bid to promote local manufacturing, KPMG says there are concerns in the short to medium term.
“While the local producers invest to increase or set up additional capacity, the taxes will increase the cost of raw materials and impact the construction and manufacturing sector where some of the products are raw materials,” explained KPMG.
However, it’s not all doom and gloom in the Ruto budget as one positive move is the decision to exempt from import duty products manufactured in Special economic zones which use locally sourced raw materials.
“This is likely to spur the interest in the zones but could spark a movement of businesses into these zones to take advantage of the tax incentives.”
With the expansion of the tax base proving increasingly elusive, the government has buckled down on the formal sector which is now expected to shoulder the burden of the increased tax rates.
The government's move to heavily tax salaried employees earning above Sh500,000, expansion of the NHIF rates, and also increase the NSSF rates is not sustainable.
“While the focus on the employed provides the government with an easy target, the trend is not sustainable given that they comprise a small part of the population. The employed are also exposed to the ravages of the bad economic environment.”
KPMG says while affordable housing remains the cornerstone of the government’s economic turnaround and is seen as the key to unlocking employment opportunities it is still fluid.
“This is supposed to spur the manufacturing sector through increased demand for construction materials and finally resolving the issue of providing a conducive living environment for the citizens, however, the regulatory environment surrounding affordable housing is fluid.”
KPMG observes that the government has struggled to explain its intentions, especially on whether people who contribute will receive their money, whether it is a contribution or a tax, and who qualifies for the houses.
“This has not been made clear that those who will be allocated the houses will have to pay for the houses albeit over an extended period. These people will need an income to be able to afford the monthly repayments.”