Kenya will be spending more than half of the collected taxes on repaying loans starting next year, in a shocking reality following an era of aggressive borrowing.
It could get worse should the Kenya Revenue Authority (KRA) fall below the collection targets, with loans including the Sh20 billion Eurobond starting to fall due.
Official documents indicate the first portion of the Eurobond worth Sh80 billion will be repayable within the financial year that starts on July 1, 2018.
More pressure is expected from the massive loans granted by China for several infrastructure projects – specifically funds spent to build the Standard Gauge Railway.
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Spending projections presented to Parliament in the supplementary budget show that more than Sh700 billion will be spent on loan repayments alone.
Adding the repayments to planned social programmes such as free education and healthcare, it is easy to see that Kenya can only borrow more to keep going.
Opinions on the implication of spending more than half of all revenues to repay loans is highly divided, and often informed by political affiliations rather than reason.
Institutions that would typically provide an independent assessment such as the International Monetary Fund have flip-flopped on the subject in their contradictory opinions.
Last year, IMF warned about the country’s worrying debt levels before indicating earlier this year that all was well, albeit with disclaimers.
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“The Debt Sustainability Analysis finds that Kenya remains at low risk of debt distress. However, as measured by the standardised stress tests under the DSA framework, the vulnerability to export shocks has increased,” said the institution in one of its country updates released in February.
IMF is among the biggest lenders to Kenya, a factor that would inform its opinion on whether its customer can take up more debt.
Anticipated Government revenues could be about Sh1.5 trillion but the actual collections would be significantly smaller, considering the difficulty in raising additional funds from an already stretched tax base.
KRA has consistently fallen behind its collection targets owing to a tough business environment that has slowed creation of new jobs and depressed reported earnings by companies.
For instance, it managed to collect Sh989.9 billion in taxes against a 12-month target of Sh1.26 trillion, raising concerns over the perennial failure by the taxman to meet Treasury’s targets.
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Tax collection in nine months through March 31 fell short of the Sh950.25 billion revised target by 8.58 per cent on pro-rata basis. Treasury figures published in the Kenya Gazette recently show total tax revenue stood at Sh868.75 billion against the Sh1.267 trillion full-year target.
Without collecting enough taxes, the Government might be forced to increase its borrowing or even shelve some development projects.
Promises by the Jubilee administration and its main rival Nasa ahead of the General Election to provide free secondary education starting January 2018 is likely to complicate the funding nightmare.
Leading contenders for the Presidency, incumbent Uhuru Kenyatta and Raila Odinga, are in a contest to promise freebies that would “realistically only help to send the country deeper into debt,” said Johnson Nderi, the Corporate Finance Manager at ABC Capital.
Initial estimates indicate the programme would cost more than Sh110 billion a year -- working on the annual average of Sh40,000 -- for the 2.7 million learners enrolled in secondary schools.
“Where can we get such amounts of cash from?” Mr Nderi said of the soaring recurrent budget.
Apart from the political pronouncements that are only intended to attract votes in the upcoming polls, there has been no independent evaluation of the financial implications of such a programme.
Introduction of free secondary education, coming 15 years after President Mwai Kibaki abolished payment of fees at the primary school level, would no doubt offer huge relief for thousands of poor households.
But it is the cost of providing the services that could cause even more damage in the longer term than the ordinary citizen can take.
It might be more realistic to expect that the State could be forced into another round of borrowing to settle the debts that would be due, as it happened three years ago when a Sh63 billion syndicated loan matured.
Settling the loan owed to several commercial banks was one of the most pressing reasons Kenya raised funds through the controversial Eurobond.
“I can assure you that we will have to get new debt to retire older loans and there is no turning back,” Mr Nderi said.
Should Kenya be unable to repay the loans when they are due, it may have to seek a bailout from the IMF and World Bank because borrowing from commercial sources such as banks would be untenable.
Raising money through a sovereign bond issue, or Eurobond, would not materialise when lenders are not guaranteed that the loan and interest would be repaid promptly.
An independent research office of Parliament has already highlighted the likely challenges that would arise from under-performance in revenue collection amid soaring debt.
The Parliamentary Budget Office (PBO) has pointed out the dangers that lie on the path taken by National Treasury of aggressive borrowing without commensurate growth in revenue collection.
When most of the country’s expenditure is directed at recurrent programmes including paying salaries and servicing of debt, the risks arising from shocks such as the prolonged drought of 2016 are amplified, warns PBO.
“This could mean accruing of more debt, implying that the country could be running out of counter cyclical measures to stabilise the economy in the event of a shock,” says a report by the research office released last month.
PBO is more worried about the “fast accumulation of external debt above the projected levels” which is forecasts will adversely affect the economy in the medium to longer term when the country will be required to part with high interest and debt repayments.
In March this year, Treasury signed an $800 million (Sh82 billion) syndicated loan from four commercial banks to fund development expenditure for this financial year, sending debt levels soaring.
Not even Members of Parliament can alter the debt repayment schedule where loans and the related interest payments are settled before any other Government expenditure.
This would mean that the Sh703 billion repayments would be debited from the exchequer, significantly reducing the funds available to fund any other Government programmes.
For domestic debt, however, the National treasury has the option of rolling over the debts and only paying the debt holder’s interest, essentially buying time to repay at a future time.
PBO was concerned about the allocation to the Consolidated Fund Services where expenditures on pensions for civil servants and debt servicing are accounted.
“Therefore, there is need to consider measures of reducing and curtailing the astronomical growth in the CFS expenditures,” it said.
The increased allocation to CFS is attributed to a rise in ordinary pensions to civil servants and debt redemptions, particularly for external debt such as the international sovereign bond and the Standard Chartered syndicated loan.