Kenya’s debt servicing options in the wake of coronavirus shocks
Ephraim Mwiti
The Covid-19 pandemic has had severe impacts on the economy and negatively impacted government revenues as well as forecasted growth.
Kenya is also grappling with a locust invasion and flooding which all make for a turbulent economic future in the short and medium term.
According to Cental Bank of Kenya statistics debt currently stands at around Sh6.2 trillion.
Local and foreign debts are at Sh3.04 trillion and Sh3.117 trillion respectively.
A statistic which makes for worrying reading is that most of this debt has been accumulated in seven years.
In 2013 debt stood at Sh1.9 trillion with a paltry Sh875 billion being external debt.
Some of the tax measures taken to cushion Kenyans against the adverse effects experienced in the wake of the Covid-19 pandemic mean that the government’s collection targets will be significantly impacted. This leads to more borrowing.
Recurrent spending
This is worrying considering the debt obligation for Kenya for the financial year 2020/21 is estimated at Sh904 billion.
What complicates the numbers further is that in the Sh3.2 trillion Budget, recurrent expenditure stands at Sh1.805 trillion, with only about 20 per cent of the Budget going towards development.
This significantly lowers than the minimum threshold of 30 per cent.
The borrowing forecasted the next Budget is about Sh823 billion with Sh349.7 billion coming from foreign sources and Sh473.6 billion being local. This will in future add to the Sh904 billion annual debt obligation.
CBK governor Patrick Njoroge once referred to the borrowing as Abracadabra economics, signifying a problem in our approach to debt.
According to various economists, there is not enough economic activity to support the level of borrowing.
There is a direct correlation between high taxes and the level of debt as governments generally seek to tax more to meet their debt obligations.
Taxes on the other hand affect business activity, tax payer spending and reinvestment which further slows economic growth.
In the words of Winston Churchill, “a nation that tries to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”, the same can be said about borrowing especially when it is to finance recurrent expenditure.
It is difficult to borrow for prosperity. The domino effects of excessive borrowing are numerous, worse still is the leakages of debt due to misappropriation and diversion into other projects through the guise of budgetary support.
The question, therefore, begs what are Kenya’s debt servicing options during this period of Covid-19.
This came as Moody’s downgraded Kenya’s outlook to negative from stable on May 7 citing the shock caused by the pandemic to Kenya’s key industries.
The IMF raised its risk of debt distress to high from moderate signalling debt concerns.
Moratorioums
The solution partly depends on Kenya receiving positive feedback on moratoriums and relief that the government is negotiating with specific bilateral creditors.
Renegotiating debt should be a priority. Overtime, government needs to consider sale of its shares in strategic companies where the government has significant stake and use some of proceeds to correct the current debt problem.
Borrowing also must be limited to projects that have a return to pay it back as the concentration of debt for recurrent expenditure is not sustainable.
Treasury in October 2019 had promised to embark on aggressive measures meant to move away from commercial debt and focus on concessional loans to finance budget deficit and government programmes. This must be at the fore of Kenyan debt correction.
The debt question will not go away any time soon and with the government refusing debt relief from the G20, strategic investors are watching to see how the country unwraps itself off the complex debt web it finds itself in. The writer is a senior Tax consultant at EY.
