Kenya must now live within own revenue targets

The National Treasury and Planning CS Ukur Yattani at Treasury building before he presented the 2021/2022 budget at Parliament on June 10, 2021.[Jonah Onyango, Standard]

The government will borrow close to Sh1 trillion from local investors in the next 12 months to fund its expansive Sh3.66 trillion budget. It will also need to repay domestic loans maturing during this period.

This doesn’t bode well for the country’s recovery process. Generally, too much borrowing is not good. Taking too many loans from the local market could “crowd out” the private sector.

If we are not careful, we could easily slide back to the dark days of the mid-1990s when banks charged individuals borrowers as much as 40 per cent on their loans. Part of the reason was that the government was borrowing heavily locally, paying as much as 27 per cent on the 91-Day Treasury Bill, or a short-term government security that is paid in three months. Because government is the most secure borrower - and is paying 27 per cent, everyone else has to be charged above that.

Former President Mwai Kibaki changed this by offering local investors even less than one per cent in his second year of presidency. That is when banks started hawking loans, with interest rates going down.

Interest rates have never returned to those levels of the mid-1990s, but the government has returned with vigour to the domestic debt market. Banks, which have been spooked by the Covid-19 pandemic, are parking most of their money in government securities, leaving out individuals and businesses.  

Of course, borrowing locally cuts both ways. There are merits and demerits. When you borrow locally, you get loans on the cheap. Moreover, those loans do not come with strings attached such as those from the International Monetary Fund (IMF) and the World Bank. Thus, your sovereignty remains intact.

Borrowing locally also perpetuates a virtuous cycle where the money remains within the local economy. It is mostly local investors who get paid the money which will then be re-invested here.

Thirdly, when you borrow locally, you avoid the risks of currency exchange fluctuations, inherent in debts denominated in foreign currencies. Besides crowding out the private sector, domestic debts are expensive as they are commercial. Moreover, there is only much you can do with your own currency - you can’t use it to import some goods or services. For that, you need hard currencies.

This presents the Cabinet Secretary for National Treasury with a delicate balancing act. But as it has said, the solution lies in, first, the government cutting its cloth according to its size and second, trying as much possible to live within its means. If the government meets the revenue-collection target, there will be little, if any, need for borrowing locally.