2020 review: On public debt, its from the frying pan towards fire

In a nutshell, Kenya’s stock of public debt stood at Ksh.1.3 trillion a decade ago, today, this stock has climbed to Ksh.7.1 trillion as of September this year.

This represents a five and a half times growth in debt over the period or a cumulative annual growth rate (CAGR) of 18.5 per cent each year.

Incidentally, public debt as a debate is a familiar fore which long preceded the COVID-19 pandemic.

Kenya’s lust for huge and costly infrastructure project over the years had the country digging itself into the debt crisis pit long before the elevation of the problem in 2020.

“Indeed, debt has been a big problem for years. What COVID-19 has done is to exacerbate the challenge because of lower than expected revenues,” said economist Ken Gichinga.

While the current administration has for years defended the sustainability of Kenya’s debt, the dirt in the year became too much to be swept under the rag.

For instance, the International Monetary Fund (IMF) reclassified Kenya’s debt risk from moderate to high while global rating agencies Moody’s and Fitch have moved Kenya’s outlook as a long-term debt issuer from stable to negative.

In just 12 months to September, Kenya contracted Ksh.1.2 trillion in new loans lifting its debt levels past the Ksh.7 trillion mark from just Ksh.6 trillion in December 2019.

The new debt level being equivalent to 69.6 per cent of Kenya’s GDP.

Thinning tax revenues occasioned by economic disruptions pegged to the containment of the COVOD-19 pandemic by government has forced the State’s hand in contracting more loans.

For instance, Treasury borrowed Ksh.78.4 billion ($739 million) and Ksh.106.1 billion ($1 billion) from the IMF and the World Bank respectively to plug a growing budget funding deficit.

Today, the exchequer plans to contract another Ksh.251 billion ($2.3 billion) from the IMF over the next three years and Ksh.154 billion ($1.5 billion) from the World Bank by June 2021.

In his defence, Treasury Cabinet Secretary Ukur Yatani has previously linked the need for more debt funding as a pre-requisite to keeping the lights on for the economy as he further presents the cheaply obtained loans as a lesser evil to sources such as commercial financing.

“We have had no choice. This are circumstances we never planned for. For us to be now judged negatively for borrowing under this framework is not fair. We have a responsibility to the people. First is to save lives then prevent the economy from crashing. We can look at the debt issue at another time,” CS Yatani told the National Assembly Finance and National Planning Committee on December 1.

The Finance Minister who marked an year at the helm of the planning ministry in July this year continues to premise efforts to contain Kenya’s debt problem to concessional borrowing and fiscal consolidation.

The latter intervention has however slacked under higher spending pressures occasioned by the pandemic.

Not a revenue problem

Government defence of Kenya’s debt problem being a revenue challenge has however been dragged in the mad by economic experts who tie up the country’s borrowing woes to uncontrolled and mismanaged spending.

Chief Executive Officer to the Institute of Economic Affairs Kwame Owino for instance insists Kenya’s debt problem will have no remedy but for a rationalization in spending.

“Kenya’s public debt problem comes from the spending side and not the revenue side. My view is this country is collecting as much revenue as one can collect from the poor people. There are not too many rich people for which the debt solution can come from higher taxes,” he said.

A research note from analysts at Cytonn investments meanwhile recommends intervention measures including the reduction of capital expenditure and public-private partnerships as solutions in doing away with heavy debt contracting.

On his part, Ken Gichinga calls for the inclusion of the Central Bank of Kenya (CBK) in the public debt debate.

According to him, the reserve bank has escaped its role of diluting the need for borrowing by increasing money in circulation in tandem with the size of the economy and the growing population.

“Monetary Policy is broken. This is the reason we see the Treasury going to borrow money every so often. We cannot fix the fiscal without looking at the monetary. CBK needs to play its dual mandate of looking at not just inflation but also unemployment to grow the volume of money in circulation,” he added.

Kicking the can down the road

With the borrowing limit having just been raised in October 2019 to Ksh.9 trillion, pressure points are already growing indicating the country will breach this limit shortly.

According to the 2019/20 Public Debt Management report by the National Treasury, Kenya’s debt is expected to skyrocket to Ksh.10.4 trillion by June 2024.

The previous extension of the debt limit appears to have come with lose conditions as the government remains on a borrowing spree with no consequences.

Higher debt levels in the near term imply more pressure on government revenues to effect development plans and ultimately the need for greater taxes to plug debt refinancing requirements.

According to data from the World Bank and the CBK, individual Kenyans now owe more per head than they earn in an year.

Public debt per capita has grown ahead of GDP per capita with a 14.7 per cent CAGR over the last 11 years in contrast to 3 per cent to leave debt per head at a high Ksh. 110,500 against a GDP per capita of 96,000 at the end of 2019.

Kenya’s ultimate pain will be defaulting on debt obligations which it is yet to fail on in 57 years of self rule.