Kenyans face hard times ahead as State sinks deeper into debt

By James Anyanzwa

Nairobi, Kenya: Kenyans may soon be facing tough times as the Government borrows heavily to fund its expanded operations and the ambitious projects pledged under the Jubilee manifesto.

Experts are warning of a looming surge in the cost of living caused by the high cost of bank credit and an upsurge in commodity prices as Treasury battles to fill glaring revenue shortfalls through short-term borrowing.

High interest rates

The latest signs of a possible return of high interest and inflation rates were seen last month, when the Government’s volume of borrowing through Treasury Bills and Bonds swelled to Sh1.1 trillion from Sh858.8 billion a year ago.

According to official data from the Central Bank, the Government’s weekly borrowing also climbed to a high of Sh300 million, with securities accounting for a huge chunk (93.5 per cent) of the gross domestic debt on May 24.

This comes on the back of a record Sh1.64 trillion Budget announced for the 2013/2014 financial year, which has left Treasury technocrats scrambling for financing options.

“We are looking at a situation where the prices of goods will rise, and this is not good for Kenyans,” said Martin Napisa, the national coordinator of the National Taxpayers Association (NTA).

“The Government’s heavy borrowing from the domestic market will definitely have a serious impact on interest rates. Banks will adjust their rates upwards and it will be very expensive for anyone to borrow money. Credit will be out of reach for the common man.”

According to the Parliamentary Budget Office (PBO), the stock of public debt has increased substantially over time and is tipped to grow even larger as the Government borrows to make up for persistent revenue shortfalls.

“This presents the risk that the country may find it difficult to service the debt in future under modest economic growth rates, underperformance of revenue, large contingent liabilities and increasing fiscal pressures,” said the PBO.

“The more the Government borrows, the less funds there are available for the private sector to borrow. This is something that could be of concern because it will crowd out the private sector from credit,” added Nikhil Hira, head of tax practice at Deloitte  East Africa.

“We have a debt to gross domestic product (GDP) ratio that is higher than the internationally accepted standard of 45 per cent simply because our tax collections don’t meet the targets.”

The stock of public debt has more than doubled since 2005, growing from Sh749.5 billion to Sh1.8 trillion as at December last year, equivalent to 51 per cent of the GDP.

According to CBK, cumulative interest and other charges on domestic debt for the period July 1, 2012 to May 24 totalled Sh94.5 billion, compared to Sh69.9 billion over a similar period the previous fiscal year.

Current account deficit

The deficit in the current account is projected to stand at Sh304.6 billion for the 2013/14 fiscal year.

According to the PBO, the Government must enhance revenue collection, drive growth through devolution and tighten its fiscal belt through expenditure prioritisation for macroeconomic stability.

“These are hard times and they require hard choices,” it said.

The economy is projected to grow at six per cent this year, but shrinking revenue collection, growing Government spending, unpredictable weather patterns and instability in the global economy threaten its attainment.