How Treasury’s Sh700,000 debt every second will haunt future generations

Kenya’s total public debt has been growing by Sh700,000 per second on average since President Uhuru Kenyatta took over government.

This means that the country has been borrowing about Sh40 million per hour that adds up to about Sh1 billion every day or Sh30 billion per month.

It is this borrowing spree that has pushed up Kenya’s outstanding debt by Sh1.065 trillion in the last three years to hit Sh3.4 trillion according to the latest figures that were released by Treasury last week. Going by this borrowing trend, Kenya’s public debt could hit Sh4 trillion soon. In the next financial year, Treasury plans to borrow Sh689.1 billion to plug the growing deficit.

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To put these hard numbers into perspective the Government has been borrowing about Sh355 billion every year, an amount that is enough to construct about 10 Thika Superhighways every year.

The borrowing is also enough to fully fund the construction of the first phase of the Standard Gauge Railway (SGR) railway. The first phase, which runs from Mombasa to Nairobi and whose construction is now 80 per cent complete has cost the country Sh327 billion.

With this debt, the country can pay for the 609km-long railway line and still be left with some change if it was to exclusively use the money borrowed towards it.

But Treasury Cabinet Secretary Henry Rotich has always given the same answer to anyone who thinks that the country may be borrowing a little too fast than it should: our debt is sustainable.

Deficit levels

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During last week’s budget speech, Rotich sought to reassure the National Assembly after its budget committee registered some discomfort on the current borrowing spree. “Mr Speaker, allow me to assure this honourable House that Kenya’s public debt remains sustainable. We have been careful to maintain our external and domestic debt well within our capacity to service the same,” Rotich told legislators on Wednesday last week.

“We remain committed to bringing the fiscal deficit down gradually to below 4 per cent of GDP in the medium term. This reduction should strengthen our debt sustainability position,” Rotich said.

Rotich draws his confidence in a Debt sustainability Analysis that was conducted jointly by the Kenyan Government, the International Monetary Fund (IMF) and the World Bank which concluded that Kenya continues to face low risk of debt distress.

He says that the country is way below its borrowing limit with the net present value of our public debt to Gross Domestic Product (GDP), the total value of all goods and services produced in the country in a year, being below 50 per cent.

“As our debt is principally focused on the development of infrastructure it is significantly beneficial to Kenyans,” Rotich said. But it is this very point where the money is being invested that had rattled Parliament.

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Several days before he addressed Parliament, the Budget and Appropriations Committee had tabled its report on the estimates of revenue and expenditure for 2016/17 financial year and the medium term.

In the report tabled by Mbeere South legislator Mutava Musyimi, who chairs the Budget Committee, the 51 member team was concerned that Kenya’s public investment using borrowed funds has not yielded enough assets to warrant that borrowing.

“Despite commitments by the Government to reduce the deficit levels over the medium term, this appears to be a moving target as the figures are continuously adjusted upwards,” Musyimi noted.

The report notes that over the period 2012/13 – 2014/15, the allocation towards development grew by 29 times in nominal terms, with borrowing forming part of the development financing.

“However, the rate of completion of projects has been very low,” the committee notes. As of June 2015, there were more than 1000 projects which were classified as ongoing. The cost of completing these projects is estimated to be at Sh3 trillion.

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Given the past trends where cost always overruns in project implementation, it means that the overall completion of these projects will eventually be more than Sh3 trillion.

During Kenyatta’s first budget as President, the Government had a total outstanding public debt of Sh2.4 trillion. In 2014/15, the second year, the outstanding debt rose by Sh200 billion to Sh2.6 trillion.

It is in the third year that the debt grew faster. Treasury figures shows that in the current financial year, 2015/16, total public debt stands at Sh3.4 trillion, a staggering Sh800 billion jump in one year. Ambitious revenue targets tend to fuel more spending requests and can drive up overall deficit.

The other pressure on debt is when the country fails to meet its revenue targets after setting out an ambitious spending plan. “The concern here is that when revenue eventually underperforms, the National Government is forced to either cut spending during the financial year through supplementary budgets or ramp up domestic borrowing or external borrowing to cater for the difference,” the MPs’ report reads.

“The level of deficit shows the direction of the country’s fiscal policy. If the set targets are continuously flouted, then predictability of the budget is compromised and effectiveness of the country’s deficit policies flouted.” The committee seemed to have agreed with the presentation by the Parliamentary Budget Office (PBO), a special office of budget experts that advises them.

In several reports, the PBO has been raising similar questions over the borrowing spree, with its latest warning saying the debt is approaching unsustainable levels.

Retain CDF

“The level of debt in Kenya is approaching unsustainable levels and is expected already the ratio of debt service to revenue has reached its limit of 30 per cent and is expected to bypass its limit in the 2017 by 4.7 percentage points on account of debt redemptions and interest rate costs that are expected to rise substantially in the 2017/18,” the report, Unpacking the Budget Estimates, 2016/17 reads in part. It was released a few weeks before last week’s budget speech.

The PBO experts note that despite commitments by the Government to reduce the deficit levels, the commitment has remained a moving target given that the figures are continuously adjusted upwards to accommodate the new debt needed to plug its deficit.

“One of the key concerns is the country’s continued fiscal expansion which remains the greatest challenge to debt sustainability as the country is forced to borrow to meet its increasing expenditure demands,” the PBO report adds.

But it is highly unlikely that the National Assembly will have time to interrogate these concerns already having gotten away with two major concessions from Treasury. Apart from the Sh4 billion increment the house got on its budget, the government has stood by the National Assembly in its quest to retain the Constituency Development Fund despite an earlier court ruling that had found the fund to be unconstitutional.

To beat the law, the Government has allowed the kitty to be implemented as part of financing for national government functions such as security and education. In the current budget, Rotich has handed the legislators Sh34.5 billion under a new vote head - National Government Constituency Fund.

Rotich, with the approval of Parliament, laid the ground for the current borrowing spree three years ago. This is when he presented a case for Parliament to approve expanding government’s external borrowing limit by an additional Sh1.3 trillion.

With this, the country has effectively taken up bigger loans from the international markets from the Sh250 billion Eurobond to the recent Sh75 billion syndicated loan.

But the borrowing train is not slowing down just yet. In the new budget read out last Wednesday, the Government plans to borrow another Sh689.1 billion.

Kenya’s budget deficit has almost tripled from Sh272 billion in 2013/2014 to Sh516 billion in the current financial year and it will hit Sh689.1 billion in 2016/17.

Also, Kenya, which has the biggest public debt in the region, is now racing to overtake Tanzania as the region’s top nation on budget deficit as a percentage of the GDP. Tanzania has the biggest budget deficit at 10 per cent of its GDP at current prices. It is followed closely by Kenya at 9.3 per cent and Uganda at 7 per cent.

Ironically, despite being the fourth smallest economy in the region, Rwanda has the lowest budget deficit at 5.3 per cent of its GDP.

Despite having the biggest population in the region, Tanzania is only targeting to collect a third of the revenues in taxes that Kenya has set out to raise in the new financial year.

Tanzania, which has a population of 54.3 million people is only targeting to raise about Sh466 billion in taxes whereas Kenya plans to collect Sh1.3 trillion, almost three times more, from its 44.2 million population.

Greece way

And whereas Tanzania is looking at ways to significantly reduce the tax burden from its population, Kenya is finding ways to load on its relatively fewer taxpayer’s fresh taxes.

Recently, Tanzanian President John Magufuli surprised the region’s tax chiefs when he reduced Pay as You Earn (PAYE), the tax charged on salaries from 11 per cent to nine per cent. But Kenya has only increased its tax relief on its lowest paid workers by 10 per cent, which translates to a measly Sh1,394 a year.

Opinion on Kenya’s current borrowing remains sharply divided depending on the economist and institution you ask. The same division remains in the political class with politicians from the various political inclinations thinking differently.

But what is not in dispute is the fact that the country is ramping up big debts and unless the money is properly utilised, the country may end up broke.

Debt is not necessarily a bad thing for an economy, as long as it has the capacity to repay it. Countries like Japan and the United States have borrowed over 100 per cent of their GDP. However, such debt positions need to be supported by adequate tax revenues, and the money borrowed put to productive use, not lost to corruption or wasted on trips and workshops.

Without an adequate income and high debt, a country risks heading the Greece way, with any unforeseen shocks jeopardising repayment capabilities. Further, since debt repayments are a mandatory expenditure, they must be paid first before other spending is done.

This means that the higher the public debt, the less flexibility a government has to spread out the money collected from taxpayers across economic sectors. But it is the Kenyan consumer who has to shoulder the burden of the Government’s spending spree, which include higher interest rates on loans and a rise in the cost of living.

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Budget 2016/17Standard Gauge Railway