NAIROBI: Today, we examine the economy, specifically, national debt and its implications. The raising of the national debt ceiling to Sh2.5 trillion (an equivalents of $28 billion) has far- reaching consequences for the economy. Never before has the Government borrowed so much money. In this year’s Budget Statement, the Treasury Cabinet secretary announced that repayment of debt owed to foreign entities shall exceed Sh400 billion.

This is more than the entire budget of the national government during former President Daniel arap Moi’s era. With the raising of the debt ceiling, the liability in servicing these debts will certainly double, putting pressure on the Treasury to raise more money through the Kenya Revenue Authority.

The tax collector is behind target in collecting domestic taxes. The expected Sh1 trillion tax revenue will be a tall order considering that banks have reduced their lending portfolio to businesses amid fears of an economic slowdown. The per capita debt accruing to every Kenyan will be around Sh65,000 per person.

Analysts say the motivation behind raising the national debt ceiling is partly due to the expectation by the National Treasury that the oil boom from Turkana will in the near future, mitigate the repayment of these liabilities. Global oil prices are now at their lowest in six years. It is predicted that the current price per barrel, nearly $50, might hold out for longer than earlier expected. That could prove disastrous for a country hedging its economic outlook on borrowed money and expected (un-guaranteed) future earnings.

What are the oil prospects looking like in light of the drop in the price of oil, for example? As a start, exploration companies like Tullow and Africa Oil, the main stakeholders in Kenyan oil prospects, might dampen their expectation and opt to delay or postpone pumping the oil in Turkana, especially when they feel like the earnings might not match the investment put in (and we are talking about colossal amounts of money).

In addition, the slump in the tourism sector has caused a sustained depreciation of the shilling over the last three months, meaning the cost of heavy equipment is staggering. Thirdly, a weaker shilling and higher lending rates are likely to continue depressing the economy, which already was showing signs of stress.

Last month, credit ratings agency Fitch Ratings Inc. downgraded Kenya’s credit outlook from stable to negative, citing increased borrowing by the Government amid higher spending and weak revenue collections. This means that Fitch could lower its rating of Kenya’s sovereign debt over the next one to two years if the so-called negative economic trends persist.

This report has far reaching consequences on the way investors and other partners will rate the strength of the Kenya economy. The manageability of these debts should make us worry when one considers Greece, a European Union country that has a larger economy and has been struggling to pay its debts.

Fitch Ratings gives the general outlook of a country’s long-term foreign and local currency default ratings. Kenya’s outlook moved to negative from stable. And that has a multiplier effect.

Where will the Government get the money to implement the major infrastructural projects which are lined up? Will it borrow some more? The standard gauge railway, LAPSSET project and plan to generate 5,000MW of electricity will mean more funds have to be raised to implement these projects.

This, unfortunately, is not being matched by an increase in revenue collection. Consider this, last year KRA collected around Sh1 trillion against an expenditure budget of Sh2.1 trillion.

The deficit hole will be plugged from borrowed money either from the local market, which is likely to crowd out private borrowers, or from international lenders, which might become tricky with the downgraded credit rating. The ripple effect of crowding out private borrowers from the money market is unfathomable; interest rates will shoot through the roof and investment will dry up. Now what to do?

At less than 40 per cent of receivable revenue, the National Treasury ought to put in place mechanisms to net more taxpayers. There also needs to be a radical shift as we enter into the third year of devolution and transition from net consumers to generators of national income.

Sadly, most county governments generate less than the defunct local authorities collected before. Revenue leakages ought to be sealed, efficiency enhanced and cost-cutting initiatives encouraged in the county units. Apparently, the bad habits of the national government of spending, spending and spending have rubbed off on the county governments. That needs to stop. A shilling spent should generate at the least, half a shilling.

Research has shown that service delivery and generation of revenue is hampered ordinarily because Government employees don’t take a result-oriented approach. I am not sure if a debt-laden economy will support the status quo in the long run.