How government justifies insatiable appetite for debt

By Otiato Guguyu | Published Tue, April 11th 2017 at 08:20, Updated April 11th 2017 at 09:00 GMT +3


PS Kamau Thugge, National Treasury react when he appeared before National Assembly Finance Committee during the committee meeting with at Parliament over audit querries.PHOTO:BONIFACE OKENDO

An estimated 44 million Kenyans owe creditors Sh85,304 as at December 2016, thanks to the Jubilee Government’s insatiable appetite for more credit.

The figure  could  rise once the Government concludes the current borrowing calendar that will see it seek an additional Sh100 billion internationally and Sh113 billion locally.

President Uhuru Kenyatta’s government has been accused of having huge appetite for debt to a point where the government borrows more money to pay off other debts. The move has seen the State shift goalposts on debt sustainability.

“This issue of borrowing to retire your debt is how countries operate. You have maturities that fall due over and over. That is how you do liability management,” Treasury Permanent Secretary Kamau Thugge (pictured, left) said.

“The fact that from the proceeds of the Eurobond, we used $600 million to retire a syndicated loan is not a big issue; you roll over as long as your net increase in debt is sustainable.”

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It is worth noting that within just nine months in power, the Jubilee government had crossed the Sh2 trillion mark, from Sh1.7 trillion they inherited from President Kibaki’s government in March 2013.

In 2014, the government moved to increase the external borrowing ceiling by Sh1.3 trillion to Sh2.5 trillion and pushed up the total debt to Sh2.4 trillion.

In 2015, the government hit another milestone when it crossed the Sh3 trillion mark. The Jubilee government is set to hit Sh4 trillion this year.

To allay fears, the government set out a ‘narrative’ of the proportion of debt to Gross Domestic Product (GDP) to make it look sustainable. And like the debt, Treasury mandarins have been shifting goalposts on the sustainability target - from 50 per cent to now declaring that 74 per cent of the GDP is still acceptable.

“Our debt has grown almost proportionately to our GDP every year since we have consistently made provisions towards servicing of the debt. I want to assure Kenyans that at no point has the country been at risk of default or shown any inability to pay its creditors,” the President said during his recent State of the Nation address.

Although President Kenyatta puts Kenya’s debt at about 50 per cent of our GDP which Treasury says stands at Sh7.3 trillion, the numbers say differently. With this assumption, our debt ratio at the end of the year would still be 52 per cent.

When President Daniel Toroitich Arap Moi left the helm of government in 2002, each Kenyan owed creditors Sh19,060. In ten years of President Mwai Kibaki, the per capita indebtedness doubled to Sh43,488 for every man woman and child. However if our economy grew at an average of 5.7 per cent last year, then our GDP would be Sh6.7 trillion and the ratio goes up to 56 per cent, edging closer to President Moi who oversaw debt that was 60 per cent of the $1.04 trillion economy in 24 years. In public, Treasury has also consistently placed debt figures as at June last year stating that we owe a more conservative debt of Sh3.6 trillion as PS Thugge was quoted days after Treasury signed a Sh80 billion syndicated loan.

This has helped keep the estimates at the 50 per cent of GDP mark where the custodians of Kenya’s instruments of power have consistently defended as the threshold. Debt Sustainability Analysis (DSA) conducted in 2015 concludes that Kenya’s debt is sustainable. DSA compares debt burden indicators to indicative thresholds over a 20-year projection. A debt-burden indicator that exceeds its indicative threshold suggests a risk of experiencing some form of debt distress.

The PV of public debt-to-GDP was at 45.8 per cent in 2014 but is expected to gradually decline to 43.1 per cent by 2020. In the long term, the ratio is expected to decline to 37.3 per cent in 2024.

The debt service-to-revenue ratio remains within sustainable levels. But as it becomes harder to avoid the fact that debt is almost hitting 60 per cent of GDP. An election year may slow down the economy further topping the figures, Treasury is now shifting goal posts to calm Kenyans.

The Budget and Appropriation Committee have warned Treasury that the assumption that GDP will grow at six per cent is delusional given that investor confidence wanes as we approach elections. Drought which has ravaged several parts of the country will also hamper growth in the agricultural sector.

If government is forced to borrow more and yet the economy stagnates, Debt to GDP ratios may skid to the heavens. But Treasury has a quick fix solution. They say that even if debt hits 74 per cent of the GDP we will still be ok.  “On the World Bank they have this country policy and institutional assessment capacity, the highest rating I think is six. We are just below 4, at 3.8, 3.9 around there and we are probably ranked among the top 2 top 3 in Africa,” said Dr Thugge.

“Based on that rating, they also set thresholds of debt sustainability and because we are ranked quite high, our threshold for when debt sustainability becomes worrying is 74 per cent,” Dr Thugge noted. “If it exceeds 74 per cent then these are signals that you are approaching an unsustainable position of debt,” he said.

The PS added that the net present value of debt to revenue collected, the threshold is 300 per cent as we are now in a range of 240 to 250 per cent again below the threshold. “Let us not over-exaggerate our situation we are quite comfortable and we are going to strengthen that position even more,” he said. President Kibaki managed an impressive debt to GDP at 41 per cent of the $4.28 trillion economy he oversaw in 10 years. The size of a country’s debt can also be measured against what it would take if all the citizens are to pay, how big the economy is as well as against the adults who earn an income that actually services the debt.

According to the World Bank , each Kenyan contributed Sh134,000 to the economy in 2015 which means we will require a year each to meet the current debt obligations per person.

President Kenyatta said Kenya has been effective in collecting taxes and meeting payments on time with no signs that you would be required to go to your pocket (besides taxation).

In his defense for accumulating so much debt in just one term, the President said he was driven by Kenyans’ ambitions to see grand projects.

“Kenyans are ready and anxious for an economy that is world class in attracting the investment that will turn us into a manufacturing powerhouse. My administration understands the scale of change our people need to improve their lives, thus our aggressive investment. At core, these are investments in Kenya’s future,” President Kenyatta said.

China has become a big lender on the back of the Standard Gauge Railway and budget support. Budget documents shows Chinese loans have doubled from Sh227 billion ($2.2 billion) in 2014 to Sh414 billion ($4 billion) last year.