Is Kenya living beyond its means as debt balloons?

Treasury Cabinet secretary Henry Rotich. He says Kenya‘s debt level is sustainable. [PHOTO: BEVERLYNE MUSILI/STANDARD]

The reported Government borrowing of Sh226 billion in six months should not have come as a surprise to those who studied the annual budget estimates presented to Parliament in June.

Treasury Cabinet Secretary Henry Rotich indicated then that the State would borrow a massive Sh687 billion locally, and externally, to plug an expected budget shortfall. But before retiring to pass judgment on whether the Government was justified to borrow the huge amounts there is an important question crying out for an answer.

Will the projects financed with the borrowed money generate or assist in generation of monies needed to repay the loans? Although there are no quick answers to this question, a document presented to Parliament last week suggests that of the 19 loan agreements signed with creditors, four will finance viable projects that will unlock the country’s economic potential.

The four projects account for about Sh124 billion which is more than half of the entire loans portfolio signed in the period under review. Top on the list is the Sh60,784,800,000 signed with the China Development Bank to finance infrastructure projects meant to reduce the local cost of doing business.

Next is the Sh40 billion borrowed from Japan Bank for International Co-operation to finance the development of OlKaria V Geothermal power project. Third is the Sh23,098,224,000 borrowed from Africa Development Bank to finance Sirari Corridor Accessibility project linking Isebania, Kisii and Ahero while the fourth on the list is the Sh20,261,600,000 loan facility which the Government has guaranteed on behalf of Kenya Airways.

Clearly, the economic return on the loans borrowed to finance infrastructure projects is hard to quantify except for those financing power projects because they generate revenues as soon as they are connected to the national grid. But their economic benefits are obvious especially when the projects financed provide better access to rich agricultural lands that are heavily populated such as those found in Kisii, Ahero and Isebania.

The benefits are even greater when the road improves accessibility to regions such as Northern Tanzania which is also a gateway to Rwanda, Burundi and Eastern Congo. Perhaps, the critics may need to turn their attention to scrutinizing whether the major projects the Government has undertaken give Kenyans value for money.

The still-unfolding saga in which the National Youth Service is said to have lost billions of shillings is an eye-opener at how amateurishly tax-payers’ money is lost in simple over-invoicing that can be easily uncovered with a little digging just below the surface.

The other area the Government may need to be taken to task about is its plan to build infrastructure in the special economic zones it says will be set up along the Standard Gauge Railway corridor. Evidence from other countries, especially from South-East Asia—from where the government is borrowing its model-- reveals that the State must be committed to helping local firms put up factories.

Measure of protectionism

This may include—and is certainly not limited to—putting up the buildings, connecting power and sewerage lines. For starters, the State may need to reinstate the import substitution policies adopted soon after independence. This is because no country has ever industrialised without adopting a measure of protectionism. It may also not be far-fetched to argue that many of these industrialised countries still protect some of their key sectors.

A closer look at Asian Tigers’ economies also reveals that they followed the same policies that enabled Europe and America to industrialise more than a century earlier. They set up well-financed development banks that lent to local industrial champions many of whom ended up controlling huge swathes of the local economy before going out to conquer the world.

It would be naïve to imagine that Kenya will move forward in any other way. And with the benefit of hindsight, which is a perfect science, the country may adopt measures that would ensure that the general public buys shares in the companies the state helps to finance and set up.

These measures may include a commitment that development banks will hold a sizeable number of shares in the firms they are financing which would later be off-loaded to the public through the Nairobi Securities Exchange.

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