Why Kenya is trapped in a debt spiral

From effecting jobs cuts to tame a worryingly ballooning wage bill to repaying existing loans, Treasury bureaucrats have considered a raft of options to try and stabilise the country’s debt position.

Over the past five years, the public wage bill has jumped 61 percent to Sh604.33 billion as at 2018 compared with Sh374.94 billion in 2013, according to the Economic Survey 2019.

On the other hand, servicing Kenya’s debt has grown from Sh113 billion to Sh460 billion, a 307 per cent jump or fourfold increase.

These two discretionary spending (meaning they have to be met before anything else is done in the country) are taking up all the revenues raised by the Kenya Revenue Authority (KRA) since the growth of debt is multiple times higher than increase in revenues.

The taxman’s total ordinary revenue collection in 2018 stood at Sh1.83 trillion, up from Sh974.42 billion in the 2013/14 fiscal year –underlining the mismatch between collection and the pilling pressure from wage bill and debt servicing.

A Treasury source likened Kenya’s borrowing to a speeding truck that required time to stop even if brakes are applied.

“Wages are in fact rising behind inflation which tells us why service- delivery to wananchi is weakening,” the source said.

Although Emgwen Member of Parliament Alexander Kosgey has proposed a cap on public debt threshold to an absolute Sh6 trillion, analysts say this will be a hard target.

Things have happened so fast that when the son of former minister Henry Kosgey proposed to limit public debt to Sh6 trillion, it stood at Sh5 trillion but before it could go through the law-making process, Kenya will already be above that set target.

“First we must look at whether the Sh6 trillion debt cap is realistic in the context of our current debt levels (Sh5.9 trillion) and the country’s fiscal deficit for the 2019/20 fiscal year Sh607.8Bn,” said Renaldo D’souza a research analyst at Sterling Capital.

The problem is that the government is unlikely to slow down on borrowing just yet.

“We cannot stop borrowing now we can service debt and pay wages but we will struggle to pay counties at the same time,” said Advisor, Saudi Arabian Monetary Authority (SAMA) Mohamed Wehliye.

The National Treasury knows something most Kenyans don’t know — that when debt takes up Sh3.3 for every 10 you have and paying government takes up Sh3.3, then you have burned out Sh6.6 and have Sh4.4 left to spend on development.

The Treasury has thus fallen back to borrowing to meet the gap between taxes and the budgeted expenditure called the deficit.

On average, Kenya has borrowed more than Sh500 billion each year over the last five years.

It took four years between 2009 and 2013 for the country to move from Sh1 trillion to Sh2.1 trillion.

It took two years between 2013 and 2015 to raise this figure to Sh3 trillion, one year, nine months to get to Sh4 trillion and one year, three months to get to Sh5 trillion. The country is set to hit Sh6 trillion by next June.

This is where the analogy of the truck comes in. Kenya cannot stop borrowing since loan repayments are not negotiable. But by borrowing more, especially commercial debts, the burden becomes even bigger, trapping the country in a debt spiral.

To deal with this problem the country needs to cut expenditure drastically and not just cosmetic touches that have never worked.

The National Treasury has always been promising austerity and consolidation that it will reduce the deficit gap to three per cent.

Records show that deficit rates are nowhere near the target and have remained elevated above seven per cent of the GDP and even getting to nine per cent in 2016.

In 2015, Kenya procured an additional debt (net of repayments) of Sh474 billion in 2016 an additional Sh697 billion and Sh607 billion in 2017.

The Treasury has been increasing spending in supplementary budgets instead of reducing the expenditure.

“Austerity measures which affect government spending will boost liquidity on the sovereign side, more so over the markets as Treasury delays its spending decision.

“My thinking is that unless there is a commensurate spending cut through subsequent supplementary budget(s), we are likely to see ‘austerity’ taking the form of kick-the-can-down-the-road spending by the respective MDAs (Ministries, Departments and Agencies).

This was the case in the previous budget cycle which also had the hallmarks of austerity at the front end, yet we underwent two mini budgets which further swelled the overall spending,” said Churchill Ogutu, Senior Research Analyst at Genghis Capital.

Renaldo D’souza however says he sees some progress in recent months in trying to hit the brakes, with the CBK being able to extend the average term to maturity of domestic debt—an effect of the issuance of long tenor debt.

But the continuous borrowing by Government means that we will continue to see regular debt maturities with a significant proportion of Government revenue and borrowings going to debt repayment.

“Average interest payments have declined, a direct effect of the introduction of interest rate caps in September 2016.

However, aggregate interest payments have increased as a result of the elevated levels of public debt,” D’souza said.

For the country to maintain or reduce its debt levels, the fiscal deficit must decline through both a reduction in Government expenditure and an increase in revenue. This means a decline in government borrowing.

In consideration of the current economic environment where private sector contribution to economic growth is comparatively lower than it has been in the past, thanks to a decline in private sector credit, the above is unlikely to happen.

Acting Treasury Secretary Ukur Yatani has in a gazette notice increased to Sh300.31 billion the fresh debt to be borrowed from domestic investors, which is 5.9 percent more than the Sh283.5 billion read in the June 13 Budget. Add a borrowing target of Sh324 billion from foreign financiers.

Treasury’s consolidation has wrongly been based on higher collection which never materialises as KRA continues to miss targets.

Efforts to freeze employment, travel, catering and allowances have proved insufficient in taming expenditure.

Having run out of “meat” to cut in its austerity push, the government is now going after investment money in its companies and regulators.

Government has ordered all State corporations to surrender cash balances held in banks which are upwards of Sh100 billion.

“My view is that the order to State corporations to return cash is but a compliance as it is in line with the PFM Act, 2012 which requires national government entities to return unspent cash back to the Treasury but this comes at the tail end of the year. I doubt this requirement is geared toward mid-budget cycle as it does not add up for Treasury to release cash to MDA then ask the cash to be returned midway into the financial year,” Mr Ogutu said.

The Treasury also estimates that it could collect up to Sh20.3 billion from its investments, the biggest chunk from Safaricom which is expected to line the Exchequer’s coffers with Sh15.5 billion this year.

Even as the Treasury sweeps crumps back to the dining table, it is tightening the belt to cap spending.

Capital expenditure of all parastatals has been frozen and their recurrent expenditure capped to what they spent last year.

The Cabinet has directed that all State Corporations and Semi-Autonomous Agencies (SAGA), are only allowed to spend an amount equivalent to one quarter of last year’s approved recurrent budget.

The government had issued a moratorium on all capital expenditures unless the particular expenditure item is an ongoing project and is specifically approved in writing by the National Treasury.

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