Kenya will be spending Sh2 in every Sh10 to service interests on its debt, before settling salaries, pensions, spending on development or even paying the principle sum borrowed.
In 2013 when the Jubilee government took over, Kenya was paying Sh1 and 30 cents from every Sh10 collected by the Kenya Revenue Authority (KRA) to pay interests on its loans.
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Ratings agency Moodys has downgraded our credit ratings for both local and foreign loans arguing that debt is growing faster than the Gross Development Product (GDP) and that new loans used to pay old debts are becoming expensive.
“On 08 February 2018, a rating committee was called to discuss the rating of the Kenya, Government of. The main points raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become increasingly susceptible to event risks,” Moodys said.
Moody's forecasts government debt to increase to 61 per cent of GDP in the next fiscal year (2018/19) when Kenya’s debt tips over Sh5 trillion from 56 per cent of GDP in financial year 2016/17 and 41 per cent of GDP in 2012.
Moodys downgraded Kenya’s overall ratings to B2 from B1, local debts from B2 to B3 and foreign loans from Ba2 to Ba3.
These are 11 grades below America’s triple A ratings, and is classified as non-investment grade speculative, or junk bonds.
The ratings agency dismissed by Finance Cabinet Secretary Henry Rotich as ‘Desktop Analysis’ has differed with S&P and Fitch contracted by the government to do a review of Kenya’s debt position.
Fitch and S&P both said Kenya’s long term debt was stable at B+ which would mean that is less likely to default on the debt.
The ratings comes at a crucial time for the government as Treasury shuttles between the United Kingdom and the United States talking to investors over issuing $1.5 (Sh151 billion) and $3 billion (Sh303 billion).
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The Eurobond roadshow is expected to test investors’ appetite and the rates at which they will be willing to take up the dollar debt.
Kenya said it will reform spending by using 'zero-based budgeting' to reduce wasteful spending, better management of the public wage bill, and increased planning and budgeting of public investments.
The National Treasury also plans to focus on improving the efficiency of tax collection and compliance by increasing the capacity of the Kenyan Revenue Authority, rolling out IT-related measures to reduce undervaluation of taxable income and concealment of imports, and expanding the tax base through targeted measures aimed at the informal sector of the economy.
Moodys however say that the government promise to cut spending has a history of being half-hearted and are unlikely to reduce need for more loans. This the ratings says is especially due to spending pressures on social initiatives as healthcare and free school as well as need for development to keep GDP growing.