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How Kenya’s uptake of Sh15,000 in debt every second is hurting households

By Paul Wafula | October 27th 2015

If you had school fees to pay for a child in primary school, rent obligations and food to buy, would you turn down a job offer of Sh300,000 in gross monthly pay and choose to stay home instead?

Alice just did, making what would appear to many as an irrational decision, despite being fully aware of the financial burden on her shoulders as a single mother living in Nairobi. She was retrenched in June, along with several others, after her employer scrapped her sales job, citing a difficult business environment.

She left with a pretty decent retrenchment package from a well-paying job she had held for 12 years, but after three months without a job, she knows the high costs of financing her lifestyle would strain her cash reserves. If nothing turns up soon, she knows January will find her in a pretty desperate situation.

Earlier this month, however, she got a job offer that would have put about Sh180,000 in her bank account a month, after taxes and mandatory deductions, yet she turned it down.

“It was a difficult decision to make. I obviously need a job, but I had a loan repayment of Sh110,000 to think about,” Alice told Business Beat.

It still may not be clear why she would then turn down an opportunity to put money in her account.

Until you consider that after an unprecedented nationwide cash crisis, her bank has twice raised the interest rate on her loan, and for nearly a million other borrowers, with devastating results.

Loan repayment

Lending rates have gone up by 12 per cent for some from April this year to a high of 27 per cent. Alice’s new interest rate has sent her monthly repayments to Sh131,000.

If she had taken the job, her take-home salary would be no more than Sh46,000, after Kenya Revenue Authority (KRA) takes away Sh100,000 in income tax, and mandatory deductions for pension and health insurance are made. Her rent alone is Sh43,000, and she took out the loan to start a business that flopped nearly a year and a half ago.

In the meantime, her bank has turned to the firm that insured Alice’s loan for monthly repayments as she looks for a job.

And this is an arrangement that is looking more and more attractive to borrowers newly hit with increased cash demands from their banks.

“I’m very tempted to quit my job and go into business after my bank notified me last week that my loan repayments will go up by Sh16,000. Every single shilling I earn does something important; I have nothing to spare,” said Lucas, a public relations officer.

His monthly loan repayment is Sh100,000, and his resources are strained. He is building a house and reckons that if he quits his job, his loan insurer can step in for about a year while he uses the time to devote to business to boost his income. His salary is static and largely committed to his bank after all, Lucas reasons.

“Finding an additional Sh16,000 would be like paying rent on a second house. I don’t have the kind of wiggle room in my monthly budget to do this. Defaulting, on the other hand, would spoil my chances of ever getting another loan, but a job loss is covered by insurance. I may need to quit; what other option do I have?”

Two things have happened in the macro, or national, level of the economy that are now trickling down to Kenyans like Alice and Lucas.

First, the Central Bank of Kenya (CBK) has raised interest rates to stem the rapid depreciation of the local currency and avert a possible hike in the cost of living, or inflation, which is when too much money chases after too few goods.

Second, the Government —faced with revenue shortfalls and huge projects hungry for cash —has raided domestic financial markets, borrowing heavily to plug funding shortfalls that have seen disbursements to key departments delayed, for instance, electricity supply to Parliament was cut for three days over unpaid bills early this month.

As a result, in just four weeks, the cost of short-term borrowing for the State from the bond market went up to 22.49 per cent from single-digit interest rates.

Direct competition

And now all hell has broken loose for ordinary borrowers. Essentially, the State is in direct competition for the money held by commercial banks with Alice, Lucas and other ordinary customers (including small businesses), which flies in the face of its commitment to ensure the private sector can access affordable credit.

The attractive rates on short-term Treasury Bills, which are risk free and easy to manage, are also seeing large depositors withdraw their money from banks, further reducing the cash financial institutions can lend on to small borrowers.

One of the biggest culprits in the country’s cash crunch are mega infrastructure projects, which demand billions of dollars and are largely financed through debt.

Public debt has soared 60 per cent to almost Sh3 trillion since President Uhuru Kenyatta took office only 30 months ago. It is a borrowing spree that has seen debt rise by an average of Sh40 billion every month. This works out to the State borrowing Sh1.3 billion a day, about Sh1 million a minute, or Sh15,432 every second.

Organisations like the International Monetary Fund (IMF) have warned this aggressive borrowing is higher than the economy can support.

Already, the Kenya Revenue Authority (KRA) is struggling to meet revenue targets, with the sectors of the economy that bring in money through taxes growing at critically slow levels, or not growing at all. The focus on infrastructure has also left the Government with little cash to invest in boosting the productivity of these industries.

Treasury, which has defended the country’s debt sustainability strategy, laid the ground for the current borrowing spree two years ago after it asked Parliament to approve its external borrowing limit by an additional Sh1.3 trillion.

In fact, Kamau Thugge, the permanent secretary at the Treasury, has said the State is nowhere near bursting its borrowing limits, and his boss, Cabinet Secretary Henry Rotich, has added that the Government will continue borrowing.

The approval on borrowing limits allowed the Government to increase the country’s debt ceiling from Sh1.2 trillion to Sh2.5 trillion. The rebasing of the gross domestic product (GDP) has also served to support the current speed of debt accumulation.

Recent data shows the country’s total public and publicly guaranteed debt stood at Sh2.934 trillion, or 51.29 per cent of GDP at the end of August. This is 60 per cent, or Sh1.1 trillion, more than the Sh1.8 trillion that President Uhuru’s regime inherited from the Grand Coalition government.

At Sh1.1 trillion, the current regime has borrowed more in three years than any previous government did in 10 years.

Out of the Sh2.9 trillion debt as at the end of August, the domestic market accounted for 48.1 per cent of this, falling from 49.95 per cent at the end of June.

The planned borrowing of a Sh80 billion syndicated loan from banks in coming months could push public debt above Sh3 trillion, depending on the exchange rate.

Nevertheless, Mr Rotich maintains that the debt is still within Government targets, despite early warning signs that the country is struggling with repayments.

Debt is not necessarily a bad thing for an economy, as long as it has the capacity to repay it. Countries like Japan and the United States have borrowed over 100 per cent of their GDP.

However, such debt positions need to be supported by adequate tax revenues, and the money borrowed put to productive use, not lost to corruption or wasted on trips and workshops. Without an adequate income and high debt, a country risks heading the Greece way, with any unforeseen shocks jeopardising repayment capabilities.

Further, since debt repayments are a mandatory expenditure, they must be paid first before other spending is done. This means that the higher the public debt, the less flexibility a government has to spread out the money collected from taxpayers across economic sectors.

Kenya has spent Sh132.6 billion —nearly half of the revenue it received in the first three months — on debt repayments.

Also, after realising the Government may not raise the Sh52 billion required to repay a syndicated loan that was maturing last year, the Treasury went out in the international market for Sh204.6 billion ($2 billion) through a sovereign bond in June 2014, and used a chunk of the proceeds to pay off the initial debt.

Rising costs

Rotich, who has ruled out raising taxes to meet the rising costs of running the Government, appears to have resorted to taking up debt as a strategy to meet the increasing Budget deficit. Devolution has presented new pressure points on expenditure.

And with domestic borrowing crowding out local businesses and individuals, revenue pickings are likely to get even slimmer.

Data from CBK shows the debt portfolio borrowed locally has grown from Sh1.305 trillion held in January to Sh1.384 trillion last week. This borrowing has seen the Treasury unravel CBK’s efforts to stabilise the currency, with the two institutions appearing to have differing priorities.

“Kenya has to choose between high interest rates versus a weaker currency and high inflation. With the current fundamentals, it is hard to get the unholy trinity right. Basically, you must choose between living with a weaker currency, high inflation and low interest rates, or a strong currency, low inflation and high interest rates,” Mohamed Wehliye, a senior vice president at Saudi Arabia’s Riyadh Bank, said.

“Kenya wants low interest rates, a strong currency and low inflation. This is not possible, and that’s why CBK is working at cross purposes with the Treasury.”

Further, opinion is still divided on whether the $2 billion sovereign bond met its target of reducing the pressure on domestic borrowing.

“The rationale for going for a syndicated loan is the same as it was in 2011 when the $600 million syndicated loan was taken up: to diversify sources of funding, while also using the opportunity to augment our foreign currency reserves,” John Ngumi, an investment banker, said.

“All else being equal, a syndicated loan should reduce the pressure of Government borrowing on domestic interest rates, and at the same time increase the inflow of foreign currency into Kenya, thereby supporting the shilling’s exchange rate.”

But it is the Kenyan consumer who has to shoulder the burden of the Government’s spending spree, which include higher interest rates on loans and a rise in the cost of living.

“Dyer and Blair Investment Bank clients were advised to get out of bonds in June this year. Those who did not heed our advice are crying now. The best investment at this moment in Kenya looks like cash/deposits or short-term bonds. Think about it,” investment banker Jimnah Mbaru said in a comment earlier this month.

Further worsening its repayment obligations, the Government has been taking up more money from weekly auctions to meet its borrowing.

Going forward, however, Rotich said only the amount advertised would be taken up to ease pressure on the domestic market.

“We shall only be taking what we put out and nothing more. There is enough liquidity in the market, and this will help reduce interest rates,” he said on Friday.

“The current interest rates are unsustainable and the fundamentals in the economy do not support them. We have low inflation rates and sufficient liquidity in the market, and we should start seeing banks reduce the rates from next [this] week.”

However, for Lucas and Alice, their new repayment schedules kick in in November, and they have little hope of seeing an immediate reversal in their loan rates.

Equity Bank’s management, when releasing financial results yesterday, further warned interest rates are likely to remain high until March 2016.

Payment arrears

The long-term solution is for the Government to increase internal revenue collections, minimise wastage and deal with corruption, the IMF has said, adding that though the country’s debt remains sustainable, the pace at which it is being accumulated could be a burden.

“The recent pace of public debt accumulation has been rapid; while this is financing infrastructure that should address bottlenecks and boost sustainable growth, containment of the fiscal deficit now and further medium-term consolidation efforts are also needed to limit and eventually reverse the rise in public debt,” the fund said in its September country report on Kenya.

The report notes that Kenya is struggling with co-ordinating its debts, which caused defaults in the last financial year ended June.

“The authorities are taking steps to address capacity and co-ordination problems that led to the emergence in 2014-15 of temporary external payment arrears, since cleared,” IMF said, adding, though, that this was not indicative of an inability to pay.

The first warning signs on Kenya’s debt management under the current administration came to the fore last year when the country started experiencing ‘temporary delays’ in servicing the debt.

The external arrears reported between July 2014 and March 2015 accumulated to around Sh6.5 billion ($64 million). This was blamed on capacity constraints at National Treasury’s Debt Management Office (DMO).

This saw the IMF push the government to adopt a “pre-emptive approach to process debt repayments.

Kenya will now rely on its reporting systems, rather than on invoices from lenders, to start processing debt. The payment process will start 30 days before the due date, to allow for internal approvals by the Treasury and Controller of Budget, and timely settlement by CBK. Staffing at the DMO will also be strengthened.

Additional reporting by

Moses Michira.

[email protected]

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