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The missing variables in our Public Debt Equation

By Patrick Muinde | May 1st 2021

Our public debt has become one complex equation that no one seems to understand its actual variables or how to solve it. More puzzling is that nobody seems to know the exact debt obligation. The figure varies between Sh6 trillion and Sh12 trillion, depending on who you ask.

The irony of it all is that public debt numbers are quantifiable, yet over time, we have come to wonder whether even among Treasury mandarins there is any individual who can tell us our true debt obligations.

That may explain the anguish of the over 200,000 Kenyans who camped at the International Monetary Fund (IMF) social media platforms to demand they rescind their decision to advance us about Sh259 billion. While their actions may not be of any consequence to the decision made by the IMF board, the signalling effect should ring alarm bells for The Treasury and State House. But I could be wrong on this.

The primary questions to ask here are: Why would citizens be so distrusting of their government on matters public debt? Are there valid reasons to worry about the debt question? And is there any chance that we could avert the real or perceived impending debt crisis?

Debt is okay

First things first, there is absolutely nothing wrong with borrowing to leverage economic growth and development. In monetary economics, the rule is that if you can find productive investment opportunities, then you can borrow 100 per cent. But this has to be supported by verifiable evidence of benefits vis-a-vis the cost of the debt. Subjected to these evidential thresholds, our craving for debt crumbles.

These are the facts: The minimum basic standard for any borrowing spree is ability to pay as measured in future cash flows. Analysis from the Controller of Budget reports indicate that we spent about 57 per cent (Sh413.5 billion out of Sh726.5 billion) of actual internally-generated revenues on debt payment in the first half of the 2020/21 fiscal year. In the 2019/20 fiscal year, public debt repayment was 45 per cent (Sh707.9 billion out of Sh1.57 trillion) of the total internal revenues, compared to about 38 per cent (Sh393 billion out of Sh1.04 trillion) in 2014/15.

It is worth noting that public debt is the first priority on government revenues. This implies that in all probabilities, part of what is borrowed is not only used in the development, but also on recurrent expenditure. This is against the basic constitutional limits on the application of public debt to development expenditure only.

Secondly, as per parliamentary Hansard, the borrowing limit was expanded in December 2014 to about Sh2.5 trillion and by-election night in August 2017, this had been opened to Sh6 trillion.

In October/November 2019, the debt limit was not only expanded to Sh9 trillion, but also the peg of 50 per cent against the GDP was abolished. In each of these requests submitted to Parliament, Treasury has always claimed the expanded window utilised over 10 years. But it has always been exhausted in less than three. This is outside other debts hoarded under off-balance sheet frameworks in State agencies and Public-Private Partnerships.

While Parliament has the mandate to limit excessive and reckless borrowing by the Executive, it would appear that they either lack the capacity to understand debt issues or are in bed with the Executive. This may therefore explain the citizens’ disdain for their own government on matters loans.

Non-existent revenue base

And so are there valid reasons against more debt? I think there are plausible reasons to believe that we are not getting a return on investment. One, while in official circles we talk of beneficial effects on the economy from huge infrastructure investments, employment data, government revenue trends and performance of Micro, Small and Medium Enterprises don’t reflect such impacts. As they say: Kwa ground vitu ni different.

Two, scanning through Budget Policy Statements and Budget proposals for the period between 2014/15 and 2017/18, a lot of debt was pegged of oil dollars from the Northern Corridor. However, we know there may be no oil dollars flowing to us anytime soon. That’s a classic case of counting your chicks before they hatch. Don’t mind that the chicks had not only been sold but the mother has also been mortgaged.

Third, for the past eight years, official data has painted a rosy and robust economic growth picture, which has been used to justify more debt. Formally, the unemployment rate around is still under 10 per cent and the GDP is projected to grow at seven per cent in 2021/2022. But alas, how come revenue trends miss this great economic performance? How will the economy beat all the extraordinary olds against Covid-19 to post a seven per cent when it has never done so in ordinary times since 2007?

Never mind we are in the midst of a severe lockdown, with no single economic stimulus to cushion the hardest-hit victims of the lockdown. Besides, any hope of procuring our own doses of the vaccine is pegged on another loan to come from the World Bank after June 2021!

Fourth is this annoying news of Sh2 billion majestically walking from our coffers daily to only heavens know where.

Of the over Sh7 trillion borrowed in the past eight years, how much disappeared into that bottomless hole? Who will pay for it and how shall it be accounted for in official data for return on investments? Could it be the missing variable in evaluating the impacts of the grandiose debt-driven infrastructure projects and their subsequent impact on household incomes, employment rates and government revenues?

The real tragedy

In the real world of financial economics, creative works of imagination do not pay any returns. If you have the golden streams, then dollars flow. But if you don’t have them, then you simply do not have them. The greatest tragedy right now in our public debt puzzle is official denial. Our economic and fiscal policies have maintained an aura of prosperity when basic common sense the world over is that these are indeed unusual times. Official extravagance, waste and plunder project “what a wonderful world” even when the masses sink deeper into poverty. Basic economic wisdom dictates that when you find yourself in a debt hole, you re-wire your economic structures, expand your cash-flow base and drastically restructure your expenditure programmes. I have never heard of “we MUST borrow more to get out of such a hole”.  

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