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With Sh1.2 trillion debt bill, Yatani must borrow from Peter to pay Paul

By Dominic Omondi | June 9th 2021

Treasury CS Ukur Yattani.

Kenya’s Sh1.2 trillion debt bill to be settled in the next 12 months is so deep that taxes alone can’t solve this financial mess.  

But, again, the Cabinet Secretary for National Treasury Ukur Yatani will have no option but to tap resources from donors and other lenders to retire maturing loans. It will be the same script of borrowing from Peter to pay Paul just to forestall the economy from being wheeled to the ICU.

Beginning next month, debt repayment - a first-charge expenditure whose default even for a single day triggers warning bells in the entire financial system - should take up about Sh70 for every Sh100 that the Kenya Revenue Authority (KRA) collects in taxes. Debt repayment includes interest and principle payments.  

This leaves only about Sh30 to be shared amongst all the remaining spending needs: Wages, pensioners, counties and development expenditure. But there is a problem with this.

The Sh30 should be gobbled up by wages alone.  This will leave nothing for the other expenditure items. Failure to disburse money to counties and pay pensions could easily thrust the country into a constitutional crisis.

Indeed, when the National Treasury fell behind by two months recently, county bosses threatened to go to court.

The government has also delayed development expenditure allocations, which has manifested itself in the accumulated pending bills.

As of end of March, total outstanding pending bills by the national government amounted to Sh307.8 billion, a big chunk of which was owed to contractors and suppliers, according to the latest data from the National Treasury. 

But will the National Treasury wriggle itself out of this arithmetic quagmire? Through voodoo economics, some may call it.

Basically, the government will attempt to borrow itself out of this problem.

Not all the Sh70 will be paid using taxes. Only Sh38, mostly interest payments, will be paid from taxes. The remaining Sh32 will be paid using loans. This is known as refinancing.

In fact, in the next Financial Year, of Sh1.17 trillion debt to be repaid, the Treasury is expected to refinance about Sh630 billion.

Indeed, there are plans by the National Treasury to borrow up to Sh500 billion from the Eurobond market as part of its plan to refinance some expensive maturing loans to ease the debt burden.

Another spending item that will not be paid for using taxes is development. The Government is expected to borrow close to Sh930 billion, with a big chunk of it going to capital-generating activities such as building railways, roads, hospitals, airports and dams.

This will then free up tax revenues to be used for disbursement to counties (Sh370 billion) and pension (Sh146 billion).

This money, the International Monetary Fund (IMF) told Kenya, should be used strictly for cash management, in other words refinancing. The trick for the Treasury is to replace an expensive loan, including a Eurobond that will be maturing, with a cheaper one.

Refinancing comes with what is known refinancing risks. Just what if you can’t find a cheaper loan to retire an expensive one? The result, which essentially been Kenya’s problem, is a bunch up in interest payments as the country has relied on expensive commercial loans for refinancing.

An increase in interest payments is the reason the IMF in 2018 downgraded the country’s risk to moderate (this has since been raised to high).

The Bretton Woods institution said that Kenya’s interest payments on the public debt increased to almost one-fifth of the country’s revenue, pushing Kenya up to the top five frontier economies with a higher fraction of interest payment to earnings.

And some experts, such as Dr Abraham Rugo, the country manager for the International Budget Partnership, wonder why Kenya should be using debt to pay another debt whereas the Constitution requires that debt should strictly be used for development.

But perhaps the biggest problem is that most of the expensive loans are pumped into low-yielding projects that take too long to become viable.

In the last eight years, the government has shown rapacious appetite for expensive loans, which it has sunk into low-yielding mega infrastructural projects, insisting they will pay off in future as citizens enjoy improved standards of living.

While debt has grown more than three-and-a-half times from Sh1.9 trillion in June 2013 to Sh6.7 trillion in June last year, tax revenues have barely doubled from Sh740 billion to Sh1.43 trillion over the period.

When the IMF approved for Kenya to borrow an additional Sh275 billion by issuing Eurobonds, it insisted the funds be used to “finance projects that are critical for development and have high economic and social returns and for which concessional financing is not available.”

The IMF even went ahead and highlighted some of the projects.

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