To deal with its debt problem, Kenya has to not only churn out more goods and services but also collect more taxes.
Unfortunately, even in periods of high gross domestic product (GDP) growth, tax collection has been wanting, says Razia Khan, Standard Chartered Chief Economist for Africa and the Middle East.
Tax buoyancy - which measures efficiency and responsiveness of revenue mobilisation to GDP growth - has worryingly declined over the years.
“This (decline in tax buoyancy) is something that Kenya will have to address if it is to achieve what it wants,” said Ms Khan, noting that cutting spending alone could be damaging to growth.
This has brought into focus Treasury’s task of managing debt at sustainable levels by bridging the gap between revenue and spending, also known as primary fiscal consolidation.
Khan, who in her two-day visit to Kenya last week met Treasury and Central Bank of Kenya officials, said that while there was no need to worry about debt if GDP kept growing, that growth had to result into increased taxes.
“GDP has to be generating the revenue that you need to service your debt, and that is an important qualifier,” she said, noting that with faster GDP, chances of remaining with sustainable debt position was high.
“But if you really want to reduce your overall debt level, it simply means you achieve a primary fiscal surplus. The basic difference between spending and revenue alone,” said Khan.
Already, most analysts have projected GDP growth to taper off at below six per cent in 2019 after an impressive run in 2018.
“Reassurance on debt sustainability will be a key focus in 2019. This is especially important given our projection that growth will soften to just under six per cent in the coming years,” said Khan.
She said that the 2018 growth received a boost as agriculture recovered from a drought, and as pent-up demand was released after a long period of election-related political uncertainty in the second half of 2017.
“These growth drivers will be absent in 2019 and 2020, when fiscal consolidation plans mean that the private sector will have do the heavy lifting to support growth.”
According to Khan, for Kenya to comfortably refinance (borrow to repay) maturing debts this year it will need to maintain a higher rate of GDP, preferably at a rate of six per cent and above.
But with tightening global conditions, Kenya - which has announced its intention to issue another Eurobond this year - is staring at a refinancing risk.
The Government plans to use more than half of the $2.87 billion (Sh287 billion) it intends to raise from the global money market to refinance maturing debt.
Reports have indicated that Kenya plans to issue its third Eurobond of $2.5 billion (Sh250 billion) and a syndicated loan of Sh37 billion in the financial year ending June 2019.
Institutions such as the International Monetary Fund (IMF) have warned that Kenya faces a refinancing risk due to a massive debt repayment obligation in the financial year ending June 2019.
“The higher level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly one-fifth of revenue, placing Kenya in the top quartile among its peers,” the IMF said in a staff report on Kenya.
Khan said that as much as the market was still open to Kenya’s refinancing, it expected it to undertake some reforms such as entering into a new arrangement with the IMF.