× Digital News Videos Opinions Cartoons Education U-Report E-Paper Lifestyle & Entertainment Nairobian SDE Eve Woman Travelog TV Stations KTN Home KTN News BTV KTN Farmers TV Radio Stations Radio Maisha Spice FM Vybez Radio Enterprise VAS E-Learning Digger Classified The Standard Group Corporate Contact Us Rate Card Vacancies DCX O.M Portal Corporate Email RMS
Artistic impression of the Nairobi Expressway.

It’s now official that our official debt ceiling is Sh9 trillion.

It’s now official that our official debt ceiling is Sh9 trillion.

It will no longer be pegged to a percentage of gross domestic product (GDP) as is often the practice.

Pegging debt to GDP makes it easier to compare across countries. It also means that to raise more debt and maintain the predetermined debt ratio, you must grow the economy. 

Fixing a ceiling at Sh9 trillion without reference to economic growth is shying away from fiscal responsibility.

SEE ALSO: Varsity seeks access to frozen accounts to pay salaries

Setting the said ceiling is giving the Government a blank cheque till we reach the ceiling. I can boldly predict that the Sh9 trillion ceiling will be easily breached. One can only hope the economy will have grown faster to absorb more debt. But why is debt such a big issue now?  

It is simple; it’s one of the sources of government revenues and a popular one at that. It is a more politically palatable alternative compared with tax which affects voters directly. In addition, debt can always be transferred to the next political regime or the next generation.

Economists and financial analysts suggest it does not matter how you fund your projects, either through equity (for the country tax) or debt. But they assume your objective is to maximise your returns. This may not apply to public entities where returns are amorphous, distant or hard to calculate.

The politicisation of debt may have led to the new debt ceiling, which could placate critics. The zeal to raise more taxes by targeting firms suspected of not paying their fair share of taxes could be a good distraction from debt. 

The media reports on corruption have also raised the stakes on debt politics, with many feeling that we are raising the debt ceiling to cover revenue leaks through corruption.

SEE ALSO: Transporters, Uganda reject GoK order to deposit cargo in Naivasha

Crowding effect

The debt ceiling and recent crackdown on suspected tax cheats have one thing in common: the Government’s attempt at raising more revenues. Remember a quickly retracted directive on no food on the Standard Gauge Railway (SGR) trains?

This raises the question as to whether the two approaches will lead to economic growth.

We all have debts, but they are not bad if put to good use. We do some good analysis before picking debt. We even get collateral. The Government, however, does not need to go through that. That is why debt keeps rising. Moreover, the Government pays its debt. Constitutionally, we even allow it to borrow. 

The 2016 interest rate cap made it easier for the Government to borrow at a lower rate. Was the Government capping the rate to make its own borrowing easier? It would appear this is the case. More like tethering a cow to milk? This led to the crowding effect where the Government competed for money with the private sector. Perceived as less risky, the former usually wins. How much of bank and insurance money is in Treasury bills or bonds, or better yet is lent to the Government? 

SEE ALSO: Bad debt jitters trim Equity profit

If we compare Kenya’s debt with other countries, we are doing well. We are at about 60 per cent of GDP while some countries have breached the 100 per cent mark. This should, however, not be a source of consolation. We can’t borrow indefinitely, particularly when debts come with detrimental conditions. The callers for sustainable debt should not be silenced; the critics have a point.

The alternative to debt is tax. The Government is determined to net as much tax as it can. I fully support its efforts but not in ways that discourage the taxpayers from growing their businesses and paying more taxes.

The image of well-known entrepreneurs in the dock over tax evasion could send the wrong message. One judge was right when he declared that only the Kenya Revenue Authority (KRA), and not the police, should investigate tax cases.  Such raids could have unintended consequences. Entrepreneurs and investors could remain “small” to avoid Government attention. We shall, in turn, lose in terms of economic growth and jobs.

They could also start winding down their businesses and keeping the money in banks or investing it in Government debt.  We could also get capital flight. Maybe I am biased, but most raids have targeted indigenous firms. Could that force them to sell off to foreign firms? Already, some well-known Kenyan brands like UAP Insurance or Makini Schools have been snapped up.

Where do we go from here? The Gordian knot that ties politics and economics in Kenya makes the debt problem more complex. The Government promises growth and better services, which is much easier than raising funds for that. What options do we have?

SEE ALSO: Hibernation, hustlers and the hard reality

One, put debts into sectors that promise the highest return. They are “soft” and range from education to health. But such sectors do not get you votes or political mileage like roads or rails. We see roads and bridges, but you can’t tell if someone is well educated or productive by looking at them.  

Two, give incentives to those who do the donkey work growing the economy - the entrepreneurs and investors. Such incentives will raise tax revenues.

- The writer is an associate professor at the University of Nairobi  

Debt Rate Cap Loans XN Iraki SGR Nairobi Expressway

Read More