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Why all indicators are blinking red on Kenya's debt clock

By Dominic Omondi and Otiato Guguyu | Jun 12th 2018 | 10 min read
By Dominic Omondi and Otiato Guguyu | June 12th 2018
President Uhuru Kenyatta with IMF MD Christine Lagarde on the sidelines of the G7 Summit in Quabec, Canada on Saturday.

?When asked what Kenya’s biggest threat as a country today is, many Kenyans are likely to cite Hiv and Aids pandemic or corruption.

For others, it would be the existential threat of a Westgate Mall-like terror attack or the likelihood of tribal clashes.

While all these are potent threats to the country’s existence, State officials are increasingly becoming aware of a new threat as the country emerges from a protracted political season and intermittent terrorist attacks - distress to repay the country’s debts.

Faced with the ever-increasing possibility of debt, Treasury mandarins, led by National Treasury Cabinet Secretary Henry Rotich, are not sleeping easy.

At an astounding Sh4.8 trillion, Kenya’s public debt is an ominous ticking time bomb, whose possible explosion has left Treasury officials constantly on the edge.

Already, the country’s spy agency - the National Intelligence Service (NIS) - whose chief function is to ensure the nation’s safety and economic well-being, is said to have classified debt as a threat to national security, according to insiders.

According to our fly on the wall, the motivation behind the Government’s latest overzealous crackdown on corruption and Kenya Revenue Authority’s (KRA’s) sudden strong-willed pursuit of tax evaders is a deliberate effort by the Government to get into the good books of the International Monetary Fund (IMF) should push comes to shove.

Two weeks ago, in a CEO forum organised by the Vision 2030 Delivery Board to take stock of the progress of the country’s development blueprint over the last 10 years, Central Bank of Kenya (CBK) Governor Dr Patrick Njoroge Governor reiterated that the country has no legroom to chalk up more debt.

But it was on the need to relentlessly fight against corruption that he spoke passionately.

He said corruption has some deleterious effect on the economy and the society in reference to the latest zeal by the Jubilee administration to fight corruption.

“It (corruption) affects our economy and our society first by shifting the resources away from the areas of greatest need into personal pockets or for the people that are involved in corruption,” said Dr Njoroge.

“You end up having no money to finance education, no money to pay nurses, no money to repair roads because some of the resources have been deviated into other areas,” he added.

KRA Commissioner in charge of Investigation and Enforcement David Yego during the recent launch of a two-week programme to equip investigators in Africa with knowledge in fighting tax crimes also voiced similar concerns.

“We (Africa) rely so much on financial aid. We lose a lot of money and then go borrowing because we have allowed ourselves to have loopholes for theft. I believe we have allowed it. We need to stop it completely. There is no reason why as a continent we cannot donate to Europe. Our economies are strong.”

Changes at the revenue authority, the Kenya Ports Authority, the source said, are an effort to radically ramp up tax collections as the country moves to live up to its promise to IMF that it would improve revenue collections and cut back non-essential spending.

In September, a debt-laden Government is set to face a very hostile IMF which has prescribed painful measures including removing interest rate controls, increasing taxes, and slamming the brakes on Government expenditure. The Washington-based lender has also previously recommended for the restructuring of public service workforce, akin to the infamous structural adjustment programs of the early 1990s.

This, it repeated over the weekend when President Uhuru met IMF Managing Director, Christine Lagarde, on the sidelines of the Group of Seven meeting in La Malbaie, Canada. The two are said to have discussed the progress of the Kenyan Government’s reform plan.

“Madame Lagarde reiterated the importance of fiscal consolidation to maintain debt sustainability,” said the IMF in a statement. Fiscal consolidation is a policy aimed at reducing government deficits and debt accumulation.

With its sister Bretton Woods institution, the World Bank, the IMF in a new found influence on government unlike during former President Kibaki’s regime, has already nudged the Government into overhauling the tax regime, which will see new taxes on kerosene, petrol; increased corporate taxes for business. Basic food commodities, notably maize, have also been targeted in the new tax measures.  

Raided businesses

On Friday, the biggest assortment of multi-agency enforcers raided business premises on Nairobi’s Enterprise Road in an effort to seal all revenue leakages.

Over the last few weeks alone, KRA, which an audit by Auditor-General Edward Ouko, showed tax arrears had cumulatively soared to Sh185 billion, has been on a mission to show its claws.

The taxman has lined up a number of cases, citing tax evasion, including seizure of 21 foreign-registered motor vehicles with an estimated value of Sh30 million, raiding the Inland Container Depot at Embakasi, destruction of Sh40 million counterfeit goods and arraigning the director and manager of Aquarich beverage firm in court to answer charges of manufacturing beverages without an excise licence.

There is also a countrywide clean-up of the public service targeting reckless spending and collusion to defraud the Government through procurement loopholes.

All these are aimed at returning Kenya into IMF’s good books. IMF, a lender of last resort, has already placed Kenya on its debt-distress watch list, giving Treasury six months to put the country finances in order or deny it a $1.5 billion (Sh151.5 billion) standby credit facility which would not only reduce the country’s buffer against external shocks but would also chip away the country’s creditworthiness.   

Investors in Kenya’s second Eurobond note were told as much by the transactional advisors who included Citi Bank, JP Morgan and Standard Bank.

“In the event of non-renewal of the facility, Kenya may have reduced buffers in the event of any significant exogenous shocks and significant adverse movements in the balance of payments position. In addition, statements made by the IMF may contain adverse information that could negatively impact the price of the Notes,” said the transactional advisors.  

So bad is Kenya’s debt position that CS Rotich has bemoaned how his job description has shifted from being that of a planner for the growth of the economy to that of “a circus juggler whose primary duty is to painstakingly sift through the mountain of debts, looking for red-blaring debts that need to be paid immediately and ones that can be postponed,” this is according to assocites close to the CS.

Debt repayment has left the CS with little resources to build schools, hospitals, repair roads and other development activities.

And the investors like vultures circling the sky for carrion, are ready to swoop down on the country.

Bank of America (BofA) Merrill Lynch Global Research has just changed its recommendation on Kenya from “overweight” to “market weight” as the country’s debt outlook remains a concern, having registered a sharp increase in recent years.

BofA says Kenya’s spread to Cote d’Ivoire’s and Senegal’s, has narrowed sharply since March from 150 basis points in October last year to just below 50 basis points. As a result, Kenya’s valuations no longer appear attractive.

“The country’s risk profile will be negatively impacted, resulting in higher interest costs on government borrowing which will worsen the already fragile fiscal position,” KPMG’s Associate Director Tax Services Clive Akora said earlier this year.

Almost half of all the tax revenues KRA will collect going forward will have to go towards payment of debt, including settling part of a Eurobond payment and two syndicated loans, leaving almost nothing to spend on much-needed development projects.

The Government normally operates like an employed individual.

Before money hits an employee’s bank account to be spent on food, clothing and rent, electricity, there are some deductions like the National Social Security Fund (NSSF), National Health Insurance Fund (NHIF), loans and pension. In the same way, the Government has to pay debts, pensions, salaries and allowances to constitutional officer holders, before setting aside cash for building schools and buying medicine for public hospitals.

The deductions to an individual are what is called non-discretionary spending. In public finance, it is captured under Consolidated Fund Services (CFS) which includes the President, his deputy, military salaries, pensions, debt and commitments to international bodies.

Kenya’s non- discretionary spending is set to hit Sh962.5 billion. If you add the public wage bill that stood at Sh549.1 billion, CS Rotich can barely manage to meet the recurrent expenditure of Sh1.5 trillion and have any cash to spare.

And the debt repayments are coming up fast and in such huge sums, with a broke Treasury having no money to service them.

A crisis is almost certain, with the tell-tale signs starting to show after Treasury prodded Parliament to amend the law so that even if public debt as a fraction of gross domestic product (GDP) surpasses the 50 per cent mark, it would not be in violation of the law.

“If we do not pass that law, we will default and if we default, we will be blacklisted and we will not be able to get credit, it is a credit rating issue. We are in a situation where we must make that amendment to get access to more borrowing,” said economist Robert Shaw.

“The yardstick was 50 per cent. Once you go above it, it has a habit of growing so fast. It went from 50 per cent to 55 per cent and it is now going to 60 per cent in just a few years. We are getting into a situation where all the money we raise we pay off debt and the truth of the matter is no matter how you look at it, you have to pay,” said Mr Shaw.

CS Rotich has found himself between the proverbial rock and a hard place. He is expected to refinance most of the maturing external debts - basically, borrow from Peter to pay Paul - if he is to steady the country’s economy.

This year alone, Treasury will need $1.8 billion (Sh180 billion) to settle some principal maturities. Principal maturities on foreign currency debts will rise to $2.4 billion (Sh240 billion) in 2019, a year that will see part of the $2.75 billion (Sh277.7 billion) Eurobond mature.

The country can only hope that there is also no currency shock, a sharp rise in oil prices, drought or some security or political shocks that can scare away tourists.

But with IMF’s eerie warning against the continued piling of debt still ringing in Rotich’s ears, it is going to be one of the most delicate balancing acts for the country’s top economist.

The CS is not barred from borrowing per se as he struggles to bridge the gap between the tax revenues and Government expenditure, also known as the fiscal deficit.

A fiscal deficit is calculated as a fraction of GDP - the value of all finished goods and services produced in an economy against the country’s expenditure plan.

As such, significantly growing the economy might be Rotich’s safest bet. And yet, even as the economy has grown, the Government has not collected as much in tax revenues and has been forced to borrow to plug its budget deficit. It’s also betting on the political hand shake as the magic bullet to turn around the economic fortunes.

Going by Treasury’s estimates, KRA and other state functionaries will be able to raise Sh1.9 trillion, which only leaves Sh400 billion to fund schools, hospitals, roads, repair cars, fuel police cars and even pay to light up government offices.

The figure could be lower given that historically, KRA has not been able to meet its tax targets, failing over the last five years due to over-projection, according to Budget Committee Chairman Kimani Ichung’wa.

“In 2016/17, this house committed to a deficit of six per cent, but this ended up at 8.9 per cent amidst significant expenditure pressures,” said Mr Ichung’wa.

“If the current trend continues, a lower fiscal deficit will continue to be a moving target and the country may not achieve the EAC monetary convergence criteria to bring down the fiscal deficit to three per cent,” Mr Ichungwa said.

Increased demands

This is especially so in that even if tax collections by KRA and Appropriation in Aid (A-IA), or fines and fees raised by various Government agencies, went up to the Sh1.9 trillion target, Kenya plans to spend Sh3 trillion in the financial year beginning next month. This means the country will still have to borrow more.

If the revenue collections are not up to scratch, the Sh562.7 billion planned borrowing calendar will have to expand even further.

Although Treasury has always said it wants to bridge the gap between the amount of money it raises and the amount of money it spends, technically known as fiscal deficit, it has had a bad track record over the years.  

And with the Government targeting a fiscal deficit of three per cent, this looks unlikely.


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