Bottomless pit of mystery: A tale of Kenya's rising public debt

President William Ruto with IMF Managing Director Kristalina Georgieva on the sidelines of COP27 in Sharma El-Sheikh, Egypt. [PPS]

As a satisfied client marvels at their fresh haircut in the mirror, Felix Maina sinks into the warm seat they just left.

He surrenders to the harmony of a Kenny Rodgers classic, crooning in the background, and the buzz of a colleague’s hair clipper as he finishes up with another customer.

Maina, battling slight fatigue from an early morning workout, will steal naps from such rare breaks.

Months ago, he would spend his spare time browsing social media for barbershop designs, bouncing off the ones he liked to some of his frequent clients.

“Everything will be different in a few months and it won’t come cheap,” he would joke to his clients about a planned remodelling of his barbershop, which he does not want to be named.

Decorated white and shades of yellow and orange, his business is modest. It serves two clients at a time and three if one is there for self-service. A padded bench will fit three waiting in line.

Maina’s brilliance saw him get away with his business’s basic setup. But fancier barbershops, with masseuses, are coming up. With them has come competition, especially for younger customers.

And so he thought he would have that long overdue makeover. He replaced worn-out barber capes with new ones and bought a used UV steriliser that has since broken down.

New hair clippers

He was to get new seats, mirrors and shelves, and new hair clippers. A paint job was also on the cards. So was a masseuse.

But financing such undertakings is not cheap, not with the high operation costs that partly followed a raft of taxes introduced by the Kenya Kwanza administration.

“Before I would spend an average of Sh2,000 on electricity every month. I now buy tokens worth Sh200 every morning, meaning I spend Sh6,000 monthly on electricity alone,” says the 33-year-old.

He has passed down the burden to his customers, increasing the price of a basic cut from Sh100 to Sh150. A stylish shave will set off customers Sh200, up from Sh150. The hike has seen customers keep appointments few and far between, hurting business.

On a much lower scale, he is doing the same thing as President William Ruto who, amid a financial squeeze, is going for mwananchi’s purses for more taxes.

Haunting Dr Ruto is a Sh11 trillion debt burden, which grows heavier with the tanking shilling, owing to its debt-raising effects.

Although much of the debt is inherited from former President Uhuru Kenyatta’s and Ruto’s Jubilee administration, the Kenya Kwanza administration is also borrowing heavily and has accumulated Sh2.4 trillion since September 2022, the most by any president after just 15 months in office.

“The only problem we have in Kenya is debt, and that is what has eaten my head for the last year. If for every Sh10 you collect, seven shillings go to repay debts then we have a problem because we are left with three shillings to pay salaries, distribute to the counties and fund development,” the President lamented recently.

Public debt

By December last year, Sh517 billion went to public debt service out of the Sh847 billion raised in taxes between July and December last year. This translates to six shillings and 10 cents out of every Sh10 collected in taxes. The figures are obtained from the Statement of Actual Revenue and Net Exchequer Issues, a document published monthly in the Kenya Gazette by the Treasury Cabinet Secretary.

The President says he intends to “flip” Kenya’s situation and have 30 per cent go towards servicing debt, a move that could see the government widen the tax base.

It was always clear that whoever Uhuru handed over to would not have the easiest of jobs. A solid foundation, the kind the former president said with his huge borrowing, would have meant Ruto started with a spring in his step. But the loans, most of which financed infrastructure projects, offer long-term gain at the expense of short-term returns.

“The challenge with such projects, since they reduce the infrastructure gap, is they take time before they generate enough revenue back,” says Ken Gichinga, Chief Economist of Mentoria Economics.

Still, some positive returns should have already been felt. Maina understands this concept. He borrows scarcely, doing so whenever he is eyeing predictable returns on a prospective investment.

As his business thrived in 2019, he opened another branch within his neighbourhood. With savings and loans from friends and family, he raised more than the Sh150,000 he needed to set up the new shop. Daily average returns of Sh2,000 saw him break even within months and he settled his debts.

“Growing with debt is an established concept,” National Treasury Cabinet Secretary Njuguna Ndung’u said as he presented Kenya Kwanza’s first budget to Parliament last year. “There is nothing wrong with incurring debt. The most important thing is did you get value?”

Following the money would help answer this question. Instead, it leads to a path of mystery even for independent officers charged with tracking the funds.

“Many of the things we are paying for are not accounted for. If there is no documentation to show what we are paying for, then we have a problem there,” Auditor General Nancy Gathungu told journalists during a media workshop in Mombasa last November.

The Controller of Budget (CoB) Margaret Nyakango, has similar views. She told the National Dialogue Committee (Nadco) that the Treasury was borrowing “without a plan” and offered little explanation for its borrowing.

“I have been approving payments for public debt and I have looked at what we have paid for (and) many of those things cannot be identified. You just find a name of why we borrowed and cannot trace it to anything. You cannot tell what the money was spent on and therefore there was no economic gain from that borrowing,” Ms Nyakang’o said last October.

It is difficult to establish how much has Kenya borrowed and paid back over the last decade as the National Treasury has varied records. The Sunday Standard compared the gazetted figures by the Treasury CS in the Statement of Actual Revenues and Net Exchequer Issues against the Treasury’s Annual Debt Management Reports.

Both documents quote different amounts as being Kenya’s debt services. The gazetted expenditures show that Sh6.39 trillion went towards repaying public debt (domestic and external) between 2014 and 2023. Debt reports record the amount as Sh5.46 trillion, a variation of more than Sh900 billion.

But even the annual reports have inconsistencies. Between 2014 and 2019, individual reports show the country spent nothing on servicing principal for domestic loans. Seemingly backdated principal payments are introduced in the 2019/2020 report, which shrinks the difference from Sh900 billion to slightly over Sh100 billion.

Exchange rate

Treasury Principal Secretary Chris Kiptoo explains the variances: “The exchange rate market is changing every day and what we report is different especially if we report in shillings. Numbers reported in foreign currencies are unlikely to change.”

From the reports, the sums paid out as interest for domestic loans equally stick out. Of the Sh4.36 trillion spent in repaying domestic debt throughout the last decade, Sh2.85 trillion accounted for interest, a 64 per cent ratio.

Such figures prove these loans to be expensive and negate the intentions of borrowing locally, which should insulate against interest-rate fluctuations.

According to anti-fraud expert Bernard Muchere, the heavy interest repayments reek of alleged fraud. Muchere, who worked at the National Treasury for four decades as an internal and forensic auditor, uncovered a corruption scandal worth Sh5 billion at the Ministry of Health. In 2015, he audited the construction of the Ronald Ngala Utalii College, unearthing losses worth Sh15 billion.

Muchere conducted a forensic audit of Kenya’s public debt last year and petitioned Parliament to audit the debt over possible misappropriation, arguing medium-term local borrowing is unbudgeted for and hence unapproved.

He asserted that estimates for domestic loans are not included in the Appropriations Act, only featuring in the gazetted revenues and exchequer issues.

For instance, the current Appropriation Act only okayed Sh313 billion worth of external debt to be spent on development. However, CS Ndung’u gazetted estimates of domestic borrowing worth Sh688 billion.

Another budget

“After Parliament has passed the budget, the cabinet secretary creates another budget not authorised by Parliament and has not been assented to by the President,” says Muchere, a move he argues violates the law.

The implications of bypassing Parliament, as Busia Senator Okiya Omtatah concludes, is that the Treasury is then handed a blank cheque allegedly resulting in questionable use of funds.

“What is passed by Parliament is a cosmetic budget. The real budget is hidden in the Treasury which they implement in the way they want,” says the serial public-interest litigator.

Section 50 (3) of the Public Finance Management Act requires the national government to borrow money “only for the budget as approved by Parliament and the allocations for loans approved by Parliament”.

Kiptoo’s position is that the loans are already approved when Parliament approves the “deficit path outlined in the Budget Policy Statement.”

“We cannot go to Parliament every time we want to borrow. We go to Parliament once to have our budget passed... it has the budget deficit that indicates how much borrowing we have been allowed. Once we get that permission that we can borrow this much, the next is for the National Treasury,” says Kiptoo, an argument that Muchere faults.

“People need to differentiate between the Budget Policy Statement and the budget, which is the Appropriations Act. The budget policy helps in developing a budget and the deficits are covered by the estimates of borrowing given in the Appropriations Act, which does not include domestic borrowing,” counters the anti-fraud expert.

Businessman Jimi Wanjigi, who has been vocal about Kenya’s debt, says: “All borrowing must be anchored in law and the Appropriation Act is the one we hold the president and Parliament accountable to.”

Muchere says borrowing helps circumvent the bureaucratic safeguards to withdrawing money from the consolidated fund, the government’s account at the central bank.

Drawing water

“The moment revenue hits the consolidated fund, withdrawing it is like drawing water from a stone, because of the long process involved. There must be a budget and the respective ministry or state agency must... base the exchequer issue on the budget, which the Treasury the Controller of Budget (CoB) also check and if there is budget the CoB will approve the withdrawal,” explains Muchere.

“The easiest way to withdraw money from the consolidated fund is by creating debt. Repaying debt only requires two signatures, the Treasury Principal Secretary and the CoB and the lengthy processes are bypassed,” the fraud examiner adds.

Kenya’s laws prohibit defaulting on loans and as Prof Ndung’u explained in an interview last November, the country would still have to repay its loans regardless of how they were utilised.

And Muchere believes that this fact has been exploited. In a presentation to the National Assembly Public Debt and Privatisation Committee last April, the fraud expert laid bare the interest repayments to domestic debt, which he believes are the smoking gun in a larger scheme to defraud Kenyans, which he says involves perpetual needless borrowing.

“You can see the interest in nine years. That is money being paid by Wanjiku through punitive taxes... Is this prudent financial management?” poses Muchere, terming Kenya’s domestic borrowing “a Ponzi scheme” that is kept alive through constant borrowing.

Omtatah weighs in: “These guys are using the domestic debt channel to steal from Kenyans by paying interest on these domestic debts. Ask yourself, who is participating in this domestic debt scam? It is commercial banks and state corporations. The Treasury funds the state corporations, how then does Treasury borrow from them?” states the Busia senator.

Wanjigi concurs, arguing that excluding repayments for debt, tax revenue eventually comes close to matching total expenditures.

According to the Treasury CS gazetted statements, Kenya generated revenues worth Sh13.4 trillion between 2014 and 2023, against the Sh15.2 trillion worth of expenditures excluding debt service.

“Our deficit in 10 years is slightly over Sh1 trillion, yet we over-borrowed by Sh6 trillion, meaning we borrowed our 60-year deficit. There is nothing that the president can do to repay this debt, most of which is odious,” says Wanjigi.

But Treasury Principal Secretary Dr Kiptoo refutes allegations of wrongdoing, saying: “Debt servicing cost is a function of the structure of the public debt portfolio, prevailing exchange rate and exchange rate costs. The debt portfolio evolves depending on credit market conditions, lender practices and relative size of budget deficits over time.”

Debt stock

“The budget is clear, the debt stock is there and l how much was borrowed from who, where and at what times... Maybe the question can be was it necessary to borrow, which can only be answered by those who were responsible,” the PS adds.

Former Treasury Cabinet Secretary Henry Rotich believes Kenya’s debt has been beneficial.

“I guess you drive home and you drive in some good roads all over. I want you to ask yourself if your taxes would have done those roads alone,” Rotich said in an interview on KTN News, also arguing that the records would bear out the Treasury.

Huge portions of the nation’s debt have financed recurrent expenditure, an irregularity that many entities have flagged. Medium-term loans are restricted to funding development, with borrowing to manage cash flow issues limited to the short term.

“When I was at the Central Bank, the tax to Growth Domestic Product ratio was 22 per cent... I’ve come back to the National Treasury to realise that we went down to 13.7 per cent... If you can only raise 13 per cent of your GDP from tax revenue, it means you are covering perhaps less than 90 per cent of your total required revenues that should finance development... or your total expenditures. You are leaving a large proportion of it to be financed through debts and grants,” Ndung’u said during the Spice FM interview, an assertion Wanjigi faults.

“This country does not have a revenue problem. What we have is a fraud problem. Kenyans pay their taxes ...and the Kenya Revenue Authority (KRA) has shown us that it has met its revenue targets every year,” says Wanjigi.

Indeed, KRA has been hitting its revenue targets over the last decade only failing to do so in the 2022/2023 financial year.

But Kenya faces an infrastructure financing deficit estimated at Sh338 billion ($2.1 billion) annually, according to a World Bank assessment.

“The government has to finance public goods. How tax itself flows cannot help that because you are not getting that money upfront. What you do is that you contract debt, profile and target an investment that should be completed and you can pay that debt over time,” said the Treasury CS.

Kiptoo agrees that Kenya must tame its heavy borrowing, which has seen it hit dangerous targets sooner than expected. Such includes the Sh11.1 trillion public debt mark that was projected for 2026. And the debt stock has been rising despite significant repayments, courtesy of continuous borrowing.

Breathing space

“When you borrow too much you find yourself borrowing from Paul to pay Peter, then two months later you are borrowing from John to pay Paul and three months later you are borrowing from Alice to pay John.

What you are doing is that you are delaying the problem. You are delaying reality. And even as we are doing that to give ourselves breathing space, so to speak, then let us examine our fiscal responsibility,” Ms Gathungu warned during the workshop that had brought together different stakeholders.

Gichinga sees the challenge in “mainstreaming public debt” against its intended purpose of “navigating periods of extreme difficulty such as wars and pandemics.”

“It puts the country in a very strange situation where all the fruits of the hard work of the country end up servicing creditors abroad and domestically and people don’t feel that economic growth,” the economist states.

Minutes after he dozed off, a client walks in and taps Maina on his shoulder, jolting him back to reality.