Is our ballooning public debt a ticking time bomb?

A passenger train on the Nairobi-Mombasa Standard Gauge Railway line. [Photo: File/Standard]

News that Kenya would increase its debt stock with China after securing a Sh370 billion loan to extend the Standard Gauge Railway (SGR) from Naivasha to Kisumu is sobering.

China’s debt to Kenya now stands at more than Sh2 trillion, with the SGR alone taking up Sh847 billion. The second-largest economy in the world has surpassed other top external lenders such as Japan, France and Germany to establish itself as Kenya’s biggest bilateral lender.

In 2013, China contributed 24 per cent of Kenya’s bilateral debt. This more than doubled in 2016 with the Asian powerhouse contributing more than half of external debt.

The amount borrowed from China in 2016 tripled than from Japan, which was the highest lender in 2013 at 44 per cent. Although the World Bank still remains the highest lender to Kenya with AfDB coming second, China’s debt stock has been growing at an alarming rate.

It has pushed the country’s indebtness to slightly over Sh4 trillion. Should Kenyans be worried?

As individuals, we take up debts in our lives daily; maybe to build a house, pay school fees or medical bills and sometimes just to ease our consumption from one month to another.

Like individuals, governments borrow to finance some of its operations.

Government gets its revenue from taxation, fees paid for services such as business licences and services, and to some extent foreign grants and donations. Interestingly, annual budgets are never financed fully by the revenue sources envisaged and the result is a budget deficit.

To bridge this budget deficit, the Government is compelled to borrow in order to provide goods and services to its citizens.

A Government has two structures of budgets, recurrent and development. Recurrent budget finances daily operations such as salaries and wages, travel expenses and pensions. On the other hand, development budget leans more on infrastructure – roads, railways, water projects, schools, hospitals, energy and so on.

The Government’s estimated expenditure for both recurrent and development has been growing exponentially in recent times. For instance, in President Mwai Kibaki’s 10-year regime, the recurrent expenditure estimate more than tripled from Sh274.1 billion in 2003/04 to about Sh941.2 in 2012/13.

In the same period, the development expenditure increased about 10 times from Sh32.5 billion to Sh300.2 billion. Uhuru Kenyatta has continued with the upward trajectory on public expenditure. For instance, from 2013/14, recurrent expenses were Sh1.02 trillion and will increase to an estimated Sh1.3 trillion in 2017/18, which is far below the revised budget of 2015/16 by Sh159.9 billion.

The development budget more than doubled from Sh551.1 billion in 2013/14 to Sh1.05 trillion in 2015/16. According to the budget estimates of 2017/18 it will reduce by approximately one-and-a-half times.

The current regime’s justification for high spending is an increase in development spending and expansion of government size. We saw the Government's size increased during the Grand Coalition, which meant more operational costs. In the era of Jubilee Government, size increased through devolution that established county structures.

Other issues such as the development of Thika highway during Kibaki's regime and a new terminal at Jomo Kenyatta International Airport, SGR and road network expansion by Jubilee Government have been fronted as super spender factors.

However, such spiraling spending does not come without the headache of a persistent budget deficit, leading to over-borrowing from both domestic and external sources.

To make matters more critical, our revenue mobilisation through taxes does not meet the targets set in the budget. Leakages due to overpriced tenders, and low monitoring and accountability of Government spending creates more burden, not just on the citizens but also on the external sponsors.

We have seen donors withdraw grants to the Ministry of Education in Kibaki’s time and now the Health ministry. The deficit in Government expenditure estimates is always abridged by negotiated external grants from foreign governments and organisations as well as domestic and external borrowing.

The budget deficit in Kibaki’s era more than tripled from Sh118.8 billion in 2003/04 to Sh382.4 billion in 2012/13 thus enlarging the appetite for debt financing of the budget.

The current regime has pushed the budget deficit 1.4 times higher from Sh357.5 billion in 2013/14 to Sh503.4 billion in 2015/16. The external dependency on bridging the deficit has also increased from Sh194.5 billion to Sh477.8 billion in the same period, due to massive amounts of foreign loans.

The foreign loans dependency on minimising the budget deficit was 3.7 times more than what Kibaki government had appropriated in his last year in office. The Government has projected that in the 2017/18 financial year alone, the deficit will be about Sh547.8 billion, in which Sh221.1 billion will in external loans.

The big question is: For how long will this exponential growth in debt appetite hold? Is it a recipe for economic stress for macroeconomic fundamentals? The gobbling up of money to finance Government budget domestically has crowded out the private sector credit access - at least before the law capping interest rate came into place. Lenders perceive Government as a safer option than small businesses and individuals who are riskier.

The over-dependence on external loans such as China’s is proving a burden as most of Government revenue is likely to be used to pay off the external lenders, denying the country cash for development. The capital flight is risky to foreign exchange stability and balance of payments. If these loans are not paid in time, Kenya’s credit worthiness is likely to be downgraded, affecting investor confidence.

The debt could be a nightmare in the near future. External debt has risen 2.4 times since 2013/14 from Sh764 billion to Sh1.796 trillion in 2016. Furthermore, the domestic borrowing is twice the amount appropriated in 2013, standing at Sh1.14 trillion in 2016/17 from Sh882.6 billion three years earlier. Add the latest debt from China and you have something akin to a ticking bomb.

The situation implies that the amount that we borrowed in 2016/17 as a ratio of Government expenditure in the same period was 1.28: for every shilling the Government spent it borrowed, both externally and domestically, Sh1.28.

Where does our tax revenue go if we borrow everything we spend? Kenya, in 2016/17 estimated to spend about Sh216.7 billion to service the public debt. At this rate, wealth creation in the current situation would be reduced to redundancy.

The question to the technocrats in debt management should be why we are borrowing every shilling we spend. For how long do we want the country to survive on debt?

The writer is a lecturer in the Department of Economics at Maseno University