Uhuru’s huge debt appetite fails to stimulate economy

Word loan on a stack of coins. [Getty Images]

For every Sh100 that will be collected in taxes by Kenya Revenue Authority, about Sh32 will be used for interest payments by end of June 2023 when the last of President Uhuru Kenyatta’s budget will be implemented.

This is a result of the government’s insatiable borrowing to fund big projects that has not brought commensurate returns, and compares unfavourably with the previous regime that was more cautious on debt.

In his last budget in June 2013, President Mwai Kibaki spent only Sh16 to pay domestic and foreign interest.

The rest of the money was used to pay salaries, buy drugs, build roads, hire more police officers and teachers.  

Mbui Wagacha, a former senior economic adviser at the Executive Office of the President, says the increased debt has not translated to growth in gross domestic product (GDP), the national cake.

“And if debt is not put to good use, then revenues decline,” he says.

President Kenyatta might have built thousands of kilometres of roads, a modern railway line, opened a new port in Lamu and connected more households with electricity.

But he also leaves behind a mountain of debt whose repayment is denying Kenyans clean drinking water, quality education and cheaper fertiliser, among other numerous needs.

Since taking power in 2013, the Jubilee administration has binge-borrowed over Sh6.14 trillion – more than three times the loans taken by the previous three governments combined.

However, this has barely uplifted the lives of Kenyans.

Wahoro Ndoho, chief executive of Euclid Capital and former director of public debt management at the National Treasury, says the World Bank has a policy paper that caps interest payment at 30 per cent of tax revenue.

“Beyond that point, the World Bank and International Monetary Fund (IMF) can classify the country as being in potential debt distress,” he told Weekend Business.

Once the country breaches this limit, its credit rating deteriorates, Mr Ndoho says. “Also, as they approach that number, most governments become extremely aggressive in tax collection.”

Kenya is at 32 per cent.

It is true, as Uhuru says, that GDP has more than doubled in the last nine years. However, debt has been growing faster than the country’s economic output, casting doubt on whether the borrowed cash was used prudently.

For every Sh100 worth of goods and services that was produced by end of June 2013, the government had staked a loan of Sh46 against it.

This rose to Sh68 by end of June last year.

Treasury said in its Medium Term Debt Management Strategy (MTDS) for 2021 that the country’s ambition to close the infrastructural gap has opened up the economy, spurring growth and development in the last two decades. It, however, acknowledged this has come at a cost.

“These critical investments have led to faster accumulation of public debt at a time when domestic revenue mobilisation as a share of GDP has been declining,” said Treasury in the MTDS.

Dr Wagacha argues that if you take up debt and the current generation does not the ability to repay, then the payments become inter-generational.

“You might just be passing poverty to the next generation,” he says.  

With the elections at the corner, the issue of debt is increasingly taking centre stage in the ongoing campaigns, with the two leading camps blaming each other for the growth in debt.

The country’s debt stock hit Sh8.2 trillion by end of December last year.

However, Kenya Kwanza’s Musalia Mudavadi puts it at Sh11.7 trillion, saying the high debt level includes government guarantees to parastatals.

In its official documents, Treasury says that by June 2021 the country’s guaranteed and non-guaranteed loans at Sh7.8 trillion.

Increased debt has led to higher debt service charges, and more taxes.

A tax hike on items such as airtime, fuel, beer, farm inputs and bread have meant high cost of living for ordinary Kenyans.

Kenyans are currently grappling with high food prices due to a confluence of drought, Covid-19 pandemic and high taxes on farm inputs including distribution costs as diesel prices go up.

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

The debt situation has been compounded by the pandemic that has for almost two years violently shaken the pillars of the economy, exposing its fragile fiscal position – high debt vulnerabilities, bloated spending and dwindling tax revenues.

The reason tax revenues are not keeping pace with economic growth, says the government, is due to the disproportionate expansion of the agricultural sector (a poor taxpayer) as a component of GDP.

With enough tax revenues, the government can repay creditors - a first charge - and comfortably run its affairs.

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 barely doubled from Sh740 billion to Sh1.43 trillion over the period.

Some economists are taking issue with the way the borrowed money has been used, urging the authorities to get whoever is responsible and apply harsh penalties.

Ideally, Treasury and its macro-economic department should be able to project the expected earnings and the performance of the economy to be sure that when the country starts paying a loan, for example in 10 years, the economy is earning enough to be able to pay the increased costs.

But that does not seem to have been done in the past.

While it takes some time before a country begins to reap the benefits of infrastructure such as roads or railway, with better cost-benefit analysis tools, analysts reckon Treasury could have matched projects that take long to give returns with loans of long maturity.

In the case of the Standard Gauge Railway, a Sh554.4 billion line that runs from the port city of Mombasa through Nairobi and terminating in Naivasha, the benefits of the project should have been clear before the country made its first payment on July 21, 2019.

The rail was expected to boost GDP by 1.5 per cent, enabling the Chinese loans to be comfortably paid back.

Jason Braganza, an economist who also works for African Forum and Network on Debt Development, which champions debt relief for developing countries, says the SGR will remain bankrupt for several years.

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