Debt dilemma as Kenya must now spend its way out of Covid-19 pandemic

Kenya could be set for an even higher debt stock as its development partners back additional spending amidst the Covid-19 pandemic. Even as falling tax revenues dictate the tightening of the spending belt, the partners argue economic survival becomes takes precedence in the face of global uncertainty. The push towards higher government expenditures come on the back of loans in excess of Ksh. 180billion ($1.79 billion) from the pair of the World Bank and the International Monetary Fund (IMF). “If we were having this conversation a few months ago, we could be calling for fiscal consolidation, lower fiscal deficits, expenditure cuts and higher revenues. This would however be the wrong policy to pursue in the midst of a crisis,” said World Bank Kenya Country Director Felipe Jaramillo. “When economic activity is shrinking and people have trouble getting incomes, it would be foolish for the government to step back and not provide some fiscal stimulus.” The Covid-19 pandemic has already thrown the National Treasury off its fiscal consolidation path with the Central Bank of Kenya (CBK) projecting a spike in the fiscal deficit to 8.2 percent by June from 7.7 percent in June 2019. Kenya further faces a heavier debt servicing cost even as it pursues some debt relief with the ratio of tax revenues used in debt repayments standing at 45.2 percent to imply the use of 45 cents of each shilling of tax earned by government in debt payments. Kenya’s development partners back increased spending to include new borrowing but the same parties have slapped the country with a weaker ratings on its debt sustainability. For instance the IMF raised Kenya’s debt distress from moderate to high on the back of its disbursement of a Ksh.80 billion ($739 million) loan from its Rapid Credit Facility (RCF). “People who sit in the middle are confused when we are asked to raise our fiscal deficits by increasing emergency spending even as we get negative assessments on our debt position,” reckoned Stanbic Bank regional economist Jibran Qureishi. At the end of March, Kenya’s debt stock stood at Ksh.6.3 trillion while debt payments planned from the fiscal year beginning on July 1 sit at a record Ksh.904 billion. Debt servicing is expected to remain an ongoing concern for government with debt repayments being set to cross the Ksh.1 trillion mark in the subsequent 2021/2022 fiscal year. According to Moody’s Investor Service global senior analyst David Rogovic, Kenya’s debt distresses are set to remain profound after the pandemic as the Treasury faces up to a lower tax base resulting from current tax cuts. “Presently, concerns are mitigated by liquidity provided by the IMF and the World Bank and that informs part of decision to uphold the stable outlook. Over the medium term, concerns will be exacerbated by the current crisis. Even when the crisis ends, we would still have a lower tax revenue base,” he said. Rogovic further expects the cheap funding from the IMF, World Bank to dry up under normalized conditions as the now free-flowing loans become attached to stricter conditions warranting a review of the tax system to include a possible repeal on the majority of tax waivers. Kenya however enjoys an adequate macro-economic framework that includes robust growth rates which averaged 5.5 percent in the last five years, has predictable inflation rates and strong foreign currency reserves. Allen Dennis, a senior economist at World Bank Kenya says Kenya must endeavour to first squeeze out all cheap loan sources before turning to commercial loans at the end of the global emergency. “Even if we return to normalcy tommorrow, Kenya will still be in need of external financial support. It is in the best interest to maximize the use of concessional financing,” he said. On its part, the National Treasury has emphasized it remains on a fiscal consolidation path that will see it seek to return to concessional financing over commercial borrowing even as the pandemic threatens to throw the exchequer off the course. “Although the pandemic has exerted pressure on expenditures, the government is committed to fiscal consolidation to safeguard debt sustainability. The government is improving the efficiency of spending and reducing waste through measures to strengthen public financial management and system reforms,” said Treasury Cabinet Secretary Ukur Yatani.

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