What the government should do to get out of this debt trap

Public debt

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

Photo credit: File

Kenya’s economy has been pummelled by the coronavirus crisis at a time when more of its debts are falling due and as it is still grappling with gaping fiscal deficits.

The rate at which the government is accumulating loans is alarming. According to the National Treasury statement on borrowing and public debt management dated December 2020, the government contracted new external loans amounting to Sh1.87 trillion between February 2017 and August 2020, “to finance capital expenditures and refinance public debt obligations due.”

In economics, it is factual that as a country borrows to repay loans, there is no generation of new wealth and it may not be able to repay its loans in future.

Kenya’s experience with its two international Eurobond loans, the latest one issued in two equal tranches — one repayable after 10 years, and the other after 30 years — showed that the country is expected to pay more for the second issuance compared to the first. This is because the risk of lenders losing their money was higher for the second issuance.

With Kenya already struggling to service its loans, allowing counties to borrow more will expose them to privatisation of natural resources and opening up of counties to multinational corporations, thereby killing local industries. Firstly, the government should reduce its recurrent expenditure.

Human capital

Secondly, it should merge state corporations and parastatals that consume a lot of funds.

Thirdly, it must increase its investment in human capital to promote entrepreneurial activity. Thus, the current focus on technical training institutes must be sustained.

And lastly, serious attention should be directed to developing local enterprise especially those that produce import substitutes, for instance rice and sugar in the agricultural sector.

These remedies will help the government solve a lot of problems the country is facing. Addressing food insecurity, unemployment and education among it’s citizens will be critical.

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