OPINION: Don't be lied to; borrowing to repay loans is bad economics

[Photo: Courtesy]
President Uhuru Kenyatta is in China (with former Prime Minister Raila Odinga) to borrow Sh368 billion to complete the second phase of the Standard Gauge Railway from Naivasha to Kisumu.

Thereafter, he will send a delegation to China to take another loan of Sh250 billion to repay yet another loan that is falling due soon.

There is a high likelihood China will gladly sign the cheque because it sees the SGR as part of its long term plan through the $1.2 trillion Belt and Road Initiative also known as the New Silk Road- one of the most ambitious projects of the 21st century- to encircle the world with its diplomatic, financial, commercial and trade tentacles.

By any means, this is a solid development agenda for China and to a great extent, the rest of the world. Make no mistake, a rising China is good for the world. For Kenya, the devil is in the details: Kenya’s growth prospects seem at variance with China's frenetic rush to conquer the world.

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Before any loans are settled, the country’s cumulative debt will have crossed Sh6 trillion, which is close to the value of goods and services produced as measured by the Gross Domestic Product. What immediately comes to mind is that without taking new loans, there is no way of repaying the older ones which, in a nutshell, is a sign of an impending financial crisis.

Tragedy is that borrowing to repay a loan means entrapment that worsens as the country burrows deeper into debt. It should have been apparent to the Jubilee administration much earlier that taxes would not grow as fast as its pace for accumulating debt, and that the pessimist approach offers key lessons in accounting and financial management.

Working with a worst case scenario in planning and managing finances creates room for adjustment when projections do not go according to plan. But while loans have grown rapidly, taxes have lagged behind. We are now in a situation where we will start spending Sh1 trillion to repay loans; the equivalent of taxes collected by the Kenya Revenue Authority in nine months.

The belief, all along, was that KRA could be pushed to collect sufficient revenues to settle the debt repayment bill besides the usual expenses of running the government, including paying salaries and hefty allowances.

In subsequent years, the loan repayment bill will grow bigger, yet we have not figured out how to match that growth with revenue. So, it will be a perpetual run on the treadmill to keep refinancing old debts, much to the anguish of the future generations who might not understand why so much was borrowed now.

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President Uhuru KenyattaSh368 billionStandard Gauge Railway