Government struggle to raise Sh4 trillion to repay debts

National Treasury Cabinet Secretary Henry Rotich

Kenya may have to put more development projects on the back burner as the Government struggles to raise a staggering Sh4 trillion to repay debt over the next five years.

Going by the National Treasury’s budget estimates for the upcoming 2018/19 financial year, the country faces an uphill task to pay off piling debt amid struggles by Kenya Revenue Authority (KRA) to meet its tax collection targets.

The country is also under pressure to improve its dwindling export and tourism earnings to keep up with its debt obligations.

According to the National Treasury’s projections released last week, about 37.5 per cent of the total debt repayment amounting to Sh1.5 trillion ($15 billion at current exchange rate), is foreign debt.

This means the country will be under pressure to get more foreign currency from its export earnings and tourism receipts.

Diaspora remittances have also played a critical role in shoring up the country’s foreign currency reserves.

As at December last year, the country’s exports were valued at $5.8 billion (Sh586 billion) while earnings from services stood at $5.1 billion (Sh506 billion). Secondary income, which includes diaspora remittances, stood at $4.5 billion (Sh454.5 billion).

Should the Government fail to adequately replenish its foreign currency reserves, it will be forced to refinance - technically borrow more - so as not to fall behind in its debt repayments.

The 2018/19 financial year that starts in July will see the country fork out Sh365 billion ($3.6 billion) in debt repayment and interests, the highest over the next five years.

About a third of this will go to China, Kenya’s biggest bilateral lender. Some of the Chinese creditors include the Government of China, Exim Bank of China and China Development Bank. Another Sh2.4 trillion will be internal debt repayment, which, though expensive, can easily be offset from the country’s own revenue collection.

Treasury has insisted that much of the external debt remains sustainable, as much of it is in concessional terms, low-interest, and has longer-term maturity.

Treasury projects revenue collection to increase to Sh2.7 trillion by the 2021/22 financial year, up from the Sh1.5 trillion estimated for the current financial year (2017/18).

The Government has, however, insisted that it is in control and that it will ensure that both internal and external debts remain sustainable.

“On the external financing front, the Government will minimise the degree of foreign exchange rate risk exposure associated with the external debt portfolio,” said National Treasury Cabinet Secretary Henry Rotich in the 2018 Budget Policy Statement.

This would be achieved by adopting a deliberate approach in diversifying the currency structure of the country’s debt so as to safeguard against exchange rate risks, especially for new loan commitments.

“A cautious approach will be adopted in the issuance of external Government loan guarantees and provision of Government support to minimise the risk exposure to contingent liabilities.”

The Government is banking on the ongoing fiscal consolidation - a raft of reforms aimed at reducing expenditure and improving revenue collection - to lighten its debt burden.

With fiscal consolidation, the Government expects the country’s public debt to decline from the preliminary level of 51.9 per cent of gross domestic product (GDP) in the FY 2016/17 to 43.8 per cent of GDP in the FY 2021/22.

The Government plans to completely overhaul the current Income Tax Act, strengthen tax administration and expand the tax base as part of improving tax collection.

Treasury has also said it will put in place policy and administrative reforms to bolster revenue yields.

“These efforts will reverse the revenue losses experienced in the recent past where ordinary revenues have declined about one per cent of GDP from 18.1 per cent in FY 2013/14 to 17.1 per cent in FY 2016/17,” said Mr Rotich.

Some of the reforms  include setting up an Integrated Customs Management System  (ICMS) to seal loopholes at the customs to prevent concealment, undervaluation, mis-declarations and falsifications of import documents.

The Government is also keen on implementing the Regional Electronic Cargo Tracking (RECTS) to tackle diversion of goods that are on transit.