Country to surpass debt ceiling of Ksh9T before end of year

Over the last five years, the treasury has had to play a balancing act between servicing existing debt and taking on new debt.

The public debt is expected to hit 8.6 trillion shillings by June this year. According to the Central Bank website, public debt stood at 7.7 trillion shillings in June last year, meaning a growth of nearly a trillion.

During President Kenyatta’s second term, the public debt has grown from 4.4 trillion shillings in June 2017 to 8.6 trillion shillings by June this year. An increase of 4.2 trillion shillings.

A journey down memory lane shows the public debt has grown by 470 percent, from 1.8 trillion shillings when President Mwai Kibaki retired to the expected 8.6 trillion in June.

Parliament approved a budget ceiling of 9 trillion shillings in October 2019, which would fund the country until June 2024. The country is now two years ahead of schedule in terms of hitting the ceiling.

In the budget statement expected to be unveiled by CS Ukur Yatani, out of a budget of 3.3 trillion shillings, a deficit of 846 billion shillings exists. Should this be met through further borrowing, it could push the public debt to 9.4 trillion shillings, more than 400 billion shillings above the ceiling. 

The national assembly's budget and appropriations committee advised the national treasury to keep the budget deficit to 400 billion shillings or 3% of GDP, whichever is lower.

According to the budget policy statement, the national treasury hopes to finance the deficit through a net foreign borrowing of 275 billion shillings, while 570 billion shillings will come from the domestic market.

But, what is the impact of public debt on the country’s revenues?

The national treasury hopes to raise ordinary revenue of 2.14 trillion shillings between July 2022 and June 2023, in the form of taxes and other income.

Of this, 30 per cent, or 644 billion shillings, will be used to pay for interest on loans. 370 billion shillings, or 17 percent, will go to the counties as a mandatory allocation. 

This leaves the government with just 1.12 trillion shillings in revenue, money that is meant to finance recurrent expenditure mainly. 

That leaves no money for development, which is mainly financed through borrowing. This comes at a time when the parliamentary budget office is warning that revenues could underperform by up to 360 billion shillings.

The budget policy statement shows that of 687 billion shillings in form of interest payments, 553 billion shillings are being paid for domestic interest.

Over the last few years, Kenya’s debt structure has been changing. In 2010, 66 percent of external debt was multilateral, meaning Kenya borrowed from international organisations like the World Bank and IMF. 

That has come down to 47 percent of the total external debt. In 2010, bilateral loans, that is borrowing from individual countries, stood at 30 per cent, a rate that has remained almost consistent at 28 per cent now.

But the commercial loan component has grown from 4 percent in 2010 to 29 percent, representing relatively more expensive loan facilities.

In absolute terms, the 4.17 trillion shillings worth of external debt has the highest component in multilateral loans.

Locally, the government has increased its borrowing from banks, individuals, and institutions to now stand at 1.9 trillion shillings from commercial banks and two trillion shillings from non-banks and non-residents.

This has the private sector competing for credit with the government. And as more revenue now goes to servicing debt, resources for social services are shrinking. Private sector investments are on a decline due to decreasing access to credit, eventually reducing job creation potential.

With the increased public debt and the requirement to pay interest and the principal amounts, Kenyans have had to contend with new taxes and levies on commodities that previously attracted lower or no taxes like the VAT. This has also raised the cost of production while reducing disposable income for individuals and households.

Experts now recommend that the government pursue more concessional loans over commercial, encourage public-private partnerships, especially on infrastructure development, and review taxation on essential commodities.

 “The reason why people are not making a lot of noise about the expressway is because of the PnP. We don’t have to take expensive loans as a govt now,” Joy Kiiru, an economist at the UoN, says. 

Should the government break the 9 trillion shilling ceiling, it will be in breach of the law, unless Parliament agrees to revise the debt cap further, which will come at a cost to the economy and more fiscal challenges for the next government.