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Fear as Kenya’s borrowing hurtles towards Greece-like debt crisis

By Otiato Guguyu and Dominic Omondi | February 20th 2018
Treasury building decorated for budget day. ON 11/06/15 PHOTO: JENIPHER WACHIE

There is something ominous about Kenya’s debt. Total public debt as at December 2017 hit high levels - at Sh4.6 trillion and still counting.

With each passing day, Kenya inches closer to a debt trap. And soon it will be difficult or almost impossible for the country to repay these expensive loans. The consequences are too dire to imagine. 

And the tale-tale signs that we are closer to a debt crisis are as clear as daylight. You know something is wrong when both Treasury and Central Bank of Kenya (CBK) mellow and drop their hitherto tough talk.

 “The issue is that the room for borrowing to finance such huge infrastructural is obviously narrowing. We need to have alternative ways of financing these projects,” said CBK Governor Dr Patrick Njoroge.

Whispers and gossips of Kenya being on the verge of facing debt hurdles that were initially meant for the blogs are now finding themselves in the most professorial places.

Such loose talk has since morphed into serious public proclamations by ultra-cautious institutions such as the International Monetary Fund (IMF) and World Bank. Their verdict? You have reached your borrowing limit. 

As expected, Treasury insists that such fears are unfounded.

But the debt numbers keep growing, faster than the rate at which the economy is producing goods and services, or the gross domestic product (GDP). The Government has not been as convincing in explaining where the money to repay all these debts will come from. 

The Government also insists that the massive loans being taken up are going into the building of railways, roads, airports, energy projects, schools, and hospitals which are supposed to turbo-charge the economy, aiding in the production of more goods and services, at least in the medium and long-terms.

They hope that increased production of goods and services will result in increased taxes.

With more taxes, the Government will have enough money to settle its debt obligations.

True, it is too early to tell whether all these public investments will result in an economic boom. But so far, both economic growth and tax collections have been dismal. Debt has grown far much faster than both GDP and taxes. Kenya’s exports have almost stagnated.

“Every year since 2014, spending has been growing, but the revenues have not been growing as fast and if they do not bring down the deficit, then a crisis will hit us,” said Institute of Economic Affairs Chief Executive Officer Kwame Owino.

Cytonn Investments, an investment company, says that GDP per capita, or the economic worth of every person in the economy, has managed to stay above debt per capita (debt owed by every Kenyan) over the years, with 2017 estimates being at Sh151,000 and Sh92,000 respectively.

However, explains Cytonn, debt per capita has grown faster at an eight-year compound annual growth rate of 15.4 per cent as compared to GDP per capital at 9.8 per cent.

Fear that Kenya might struggle to repay its fast-maturing debt obligations were also given credence by the recent decision by Moody’s, a credit rating company to downgrade Kenya’s credit worthiness from Ba2 to Ba3.

It is basically a warning to investors to be a little cautious when doing business with Kenya.

We have simply been profiled as risky borrowers. This means that Eurobond that Kenya is set to issue has been classified by the American rating agency as speculative.

This means that investors who might want to invest in it would be better advised that Kenya faces major uncertainties and exposure to adverse business, financial, or economic conditions.


These risks could lead to the Government’s inadequate capacity to meet its financial commitments. It does not necessarily mean that the country is vulnerable in the long-term.

The downgrade puts Kenya’s credit position at a precarious one step into the junk territory, a highly speculative investment. “The biggest risk of the downgrade, whether appropriate or not, is what we are starting to see,” said Deepak Dave of Riverside Capital.

“As banks and other Kenyan issuers start to get notched down in credit terms, their cost of borrowing goes up, which means there is less credit available to Kenya’s economy as a whole, thus starting a circle of rising costs for every import and possible downgrading of projects that might have gotten off the ground,” added Mr Deepak.

The Kenyan Government, said Moody’s of the promise to cut spending, has a history of being halfhearted when it comes to fiscal consolidation.

Fiscal consolidation is a policy aimed at reducing government deficits and debt accumulation.

“Although the government aims to reduce the size of the fiscal deficit, given a mixed track record in terms of implementation of fiscal consolidation and demands for development and social spending on the government’s budget, effective fiscal consolidation is likely to be slower than the government envisages and unlikely to be sufficient to reverse the deterioration in fiscal strength,” Moodys said.

Post-poll violence

Jubilee’s dalliance with humungous projects has seen the country’s debt snow-ball from Sh1.8 trillion when Jubilee Government took over in March 2013 to Sh4.6 trillion in December 2017.

Some of these debts, such as the Eurobond of 2014, have been contentious. The jury is still out there as to whether, one, the money raised ever hit the country and if it did, whether it was well utilised.

“Investigations into the receipts, accounting and use of funds related to the Sovereign/Euro Bond are still ongoing and the accuracy of the net proceeds of Sh215.5 billion is yet to be ascertained,” said Auditor General Edward Ouko, in September 2016.

He recently revisited the issue in a fresh audit report on the National Exchequer Account, saying its receipt and spending are yet to be ascertained.

Economists have also been divided as to whether the over Sh400 billion the country used to build the Standard Gauge Railway (SGR) with Chinese debts is value for money  The World Bank insisted that Sh16 billion was enough to upgrade the old metre gauge railway into SGR.

A World Bank economist even went ahead to question the viability of the SGR, noting that Kenyans would be paying dearly for what is basically a “third-rate railway.”

After the saga in which National Assembly Member Alfred Keter was arrested for allegedly dealing in fake Treasury Bills, Economist Kwame Owino, through public think IEA, has called for the audit of the country’s public debt.

In ten years, President Mwai Kibaki added Sh1.2 trillion to the country’s total debt stock from Sh633 billion he inherited from President Daniel Moi in 2003.

He left the country’s total public debt at Sh1.8 trillion by the time he was leaving office.

Yet, by all measure, Kibaki did a decent job growing the economy and helping the private sector grow.

Despite the post-poll violence of 2008 which violently disrupted the economy, GDP growth averaged 5.4 per cent between 2003 and 2013. However, between 2013 and 2017, UhuRuto years, the economy has grown at 5.25 per cent.

Moreover, the country’s tax revenue collection has not been in tandem with GDP growth. A World Bank report showed that in the 2016/17 financial year, the tax-to-GDP ratio fell to 16.9 per cent, the lowest in a decade.

“Although it (revenues) grew by 13.3 per cent in nominal terms in 16/17, tax revenues expanded by less than nominal GDP 14.9 per cent, hence the tax-to-GDP ratio fell to 16.9 per cent of GDP — its lowest level in a decade,” said the World Bank in its 16th edition of Kenya Economic Update, which was unveiled last week in Nairobi.

Tax revenue, said the Bretton Woods institution, is not keeping pace with the expansion in expenditure and the buoyancy of economic growth, bringing into question Kenya Revenue Authority aggressive efforts to ensure tax compliance.

Nonetheless, the country’s fiscal deficit keeps growing with Treasury’s fiscal deficit getting wider than the budget deficit.

Treasury also keeps on increasing its budget deficit without a concrete explanation, raising concerns that the borrowing spree is driven by reasons other than prudent expenditure.

When Finance Cabinet Secretary Henry Rotich stood before parliament last year, he told legislators that Kenya would borrow Sh534 billion locally and internationally to fill the gap between what is collected as taxes and what is needed to spend.

This would later be published on the Treasury website. “The fiscal deficit in the FY 2017/18, will be financed by net external financing of Sh206.0 billion (2.5 per cent of GDP), (minus) Sh11.2 billion or -0.1 per cent of GDP comprising of Sh3.8 billion domestic loan receipts and Sh15 billion loan repayment to CBK and Sh328.9 billion (four per cent of GDP) from net domestic borrowing,” wrote the mandarins entrusted to borrow on our behalf.

However, a closer look at Treasury’s financials published on January 26, shows that it intends to borrow Sh820 billion, double what CS Rotich told the public.

The audit books raised eyebrows after Treasury decided to increase programme loans for budget support seven times from a projection of Sh900 million to Sh6 billion.

The Treasury audit books also showed that Kenya will borrow Sh531.4 billion locally, Sh32.8 billion from foreign governments and international organisations and Sh250 billions of commercial loans.

In fact, there was a Sh50 billion increment in commercial loans without any explanation.

This has seen the IEA boss call for a forensic audit of all the debts to ascertain their true value.

It is also not clear why the government kept the huge loans secret, however, investors have been jittery about the country’s huge budget deficit which requires constant spending. The Government has, however, defended its position, saying the deficit will narrow once it consolidates and starts spending less.

The State said it will reform spending by using ‘zero-based budgeting’ to reduce wasteful spending, better management of the public wage bill and increased planning and budgeting of public investments.

The National Treasury also plans to improve the efficiency in tax collection and compliance by increasing the capacity of KRA, rolling out IT-related measures to reduce undervaluation of taxable income and concealment of imports in addition to expanding the tax base through targeted measures.

These measures are aimed at the informal sector of the economy. With KRA constantly falling below targets and calling for downward reviews, this narrative seems to be falling apart as independent reviews have indicated the State is less likely to cut spending.

CS Rotich is out of country touring the US and the UK to market Kenya’s new Eurobond Issue of between $1.5 (Sh151 billion) and $3 billion (Sh303 billion). Dr Geoffrey Mwau, Director- General of Budget, Fiscal and Economic Affairs at Treasury did not, however, respond to our text messages and failed to pick our calls.

The mandarins at Treasury do not want to admit that the gap between what we earn in taxes and what we spend is growing rather than shrinking. This is because they had promised the IMF that this gap will be as low as three per cent of the GDP.

However,  the gap has widened to about eight per cent of the GDP. The IMF will be in the country to carry out a review on whether to extend the two-year standby facilities for Kenya worth about $1.5 billion (Sh150 billion) set to expire in March.

Although the IMF may give the government a benefit of doubt because of the extended electioneering period and the fact that we have completed the first phase of SGR which means we will borrow less; going forward, debt servicing costs and fiscal consolidation will be a rigid condition to be met.

If Kenya continues to have a huge budget deficit which means more borrowing, then the debt burden will continue to balloon making it more difficult to pay back.

“The cost is expected to increase over the medium term. Refinancing risk is significant as debt maturing in one year as a percentage of revenue 54.4 per cent,” CS Rotich told parliament.


Kenya is paying Sh658.2 billion against Sh1.4 trillion in expected tax revenues meaning half of all the money collected by KRA goes to pay debt.

If one adds non-discretionary spending such as salaries and pensions which are deducted even before they hit our spending accounts, Kenyans will pay Sh735.6 billion this year, leaving only Sh700 billion to be divided between counties, the national government for development.

“Most of Government expenditure is non-discretionary if you remove all those you get very little left for other things,” Dr Kamau Thugge said during the presentation of the 2018 draft budget.

If you include the secret loans, Kenya’s debt will hit Sh5.4 trillion this year from as low as Sh2.5 trillion in December 2014 which is a 116 per cent growth in four years.



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