President Uhuru Kenyatta’s government has borrowed more money in the last two years than what his predecessor did in five years (last term).
Treasury data shows that by March 2015, the Jubilee administration had borrowed Sh874.5 billion between 2013 and 2015, overtaking Kibaki’s regime, which borrowed Sh738 billion in the Grand Coalition’s last term in office.
This debt is expected to soar further this year with the Sh569 billion the Government plans to borrow this year.
This will include Sh340.5 billion from external sources. Another Sh229.7 billion will be borrowed from the domestic market. A Sh118 billion loan from China to fund the Standard Gauge Railway (SGR) is the single largest loan for a particular project this year.
At the current borrowing rate, every Kenyan child born next year will have to shoulder a debt of Sh71,000 from the current 62,000 with an average population of 42 million.
The Treasury projects that the public debt will rise by close to Sh1 trillion over the next two years, to stand at Sh3 trillion in 2016, from the current Sh2.6 trillion.
The Government has defended the growing appetite for debt, which has seen the Jubilee regime more than double year-on-year borrowing to fund ambitious infrastructure projects.
The International Monetary Fund (IMF) and the World Bank raised the red flag as early as last year on Kenya’s growing appetite for debt. In a joint statement, the two institutions warned that Kenya must put a tight lid on its debt load to keep its economy on a steady growth path. The note authored last year was written to key organs that determine their lending to member States.
However, Treasury Cabinet Secretary Henry Rotich has on numerous occasions maintained that the Government’s borrowing plans are anchored in its medium-term debt strategy paper that ensures public debt sustainability.
“The Government’s borrowing plans remain anchored in the Medium-Term Debt Strategy Paper, which aims at ensuring public debt sustainability. The strategy envisages continued borrowing from domestic and external sources with the latter being largely on concessional terms,” Rotich said in his Budget statement recently.
The CS argued that while external financing will be largely on concessional terms, the Government will continue to diversify financing sources by accessing commercial sources of financing in the international financial market.
“Non-concessional external borrowing will be undertaken in a cautious manner and limited to bankable projects and will broadly be within the ceilings in the Medium-Term Debt Strategy Paper,” Rotich said.
But the growing debt, at a time when revenue generation is stagnating, is set to put the country under pressure. On average, former President Kibaki’s government was borrowing about Sh180 billion per year. But in the two years the Jubilee government has been in power, it has borrowed about Sh437 billion every year. Kibaki’s legacy project has remained the Thika Superhighway while if everything goes as planned, the Jubilee administration will use the standard gauge railway at the end of its five year term to justify its borrowing plans.
Treasury’s Quarterly Economic and Budgetary Review report shows that Kenya borrowed Sh252.4 billion in the nine months to March 2015.
This saw the gross public debt expand from Sh2.4 trillion in June 2014 to Sh2.6 trillion by March 2015 - equivalent to 46.8 per cent of Gross Domestic Product (GDP). The Government says any debt below 50 per cent of the GDP is sustainable.
At the end of March 2015, Kenya had cumulatively repaid Sh94.3 billion to external creditors. This comprised Sh73.0 billion (77.4 per cent) principal and Sh21.3 billion (22.6 per cent) in interest.
When he took over power, Uhuru inherited a Sh1.6 trillion debt. This debt comprised of 47.8 per cent of external debt and 52.2 per cent domestic debt.
The overall increase is attributed to increased domestic debt and disbursements from external loans. “The increase is attributed to more disbursements especially from China and African Development Bank during the period under review,” the report notes.
This is set to reignite debate on whether Kenya is living beyond its means. Already, the Opposition’s budget team has raised concerns over the heavy borrowing that the Government has resorted to, instead of cutting on wasteful expenditure to fund development projects. “Presenting a Budget with a deficit of over half a trillion in a depressed economy like ours is a sign of economic irresponsibility. Financing this deficit will not be an easy task and may be impossible,” the statement from CORD legislators said.
“This is likely to hurt the economy. Most of what will not be implemented for lack of funds will likely be development projects.”
Rotich however, says the Government is projecting to raise Sh1.3 trillion - ordinary revenues of Sh1.2 trillion and Sh103.2 billion in aid. A recent study by global consulting firm Control Risks projects that Kenya’s debt burden could grow two-fold because Treasury is “running huge deficits.” “Kenya, as one of the best-governed countries in the region, is running big deficits and debt loads will double by 2017,” Control Risks Managing Director for East Africa Daniel Heal said in the statement.
Reliance on debt to plug the Budget deficit may also hurt its implementation, given that at times, Government falls way below target.
For instance, by the end of March 2015, net domestic borrowing amounted to Sh47 billion against a targeted borrowing of Sh170.2 billion.
The borrowing comprised Sh91.8 billion from commercial banks, Sh16.9 billion from non-banking financial institutions, repayments of Sh59.7 billion to Central Bank and Sh2.1billion to non-residents.
Comparatively, for the same period in 2013, the net domestic borrowing was Sh127.4 billion, comprising of net borrowings of Sh70 billion from the non-banking financial institutions, Sh5.5 billion from non-residents, Sh51 billion from commercial banks and Sh993 million from Central Bank.
But the fact that key sectors of the economy are struggling,means the Government may find it even much harder to raise revenue from its internal sources. This could force it to opt for additional debt to plug the Sh2.2 trillion budget deficit.
The hotels and restaurants sector recorded a second consecutive annual contraction of 17.2 per cent last year compared to a contraction of 4.6 per cent in 2013. “The contraction is attributable to both internal and external shocks specifically insecurity concerns and negative travel advisories by some key tourist source countries,” the report released in May says.
The rising cost of living may also put pressure on the economic growth given that Kenyans will have less money in their pockets.
Overall month-on-month inflation increased to 6.3 per cent in March 2015 from 5.6 per cent in February 2015, and 5.5 per cent in January 2015, due to higher food prices for vegetables and milk as a result of dry weather conditions in the first two months of 2015.
On average, the annual inflation rate was 6.7 per cent in March 2015 compared to 6.4 per cent in March 2014. By the end of March 2015, the total cumulative revenue including aid collected was Sh761.4 billion against a target of Sh829.3 billion.
Treasury says performance was below target by Sh67.9 billion. Ordinary revenue collection was below the target by Sh36.4 billion. The amount collected was Sh722.2 billion against a target of Sh758.6 billion.
The railway development levy collection also fell behind target having raised Sh14.4 billion against a target of Sh17.4 billion.
The cumulative ministerial aid also recorded an under-performance of Sh31.6 billion for the period under review.
Despite the growing debt, Kenyans will not be spared from the rising cost of commodities. The price of beer, cigarettes, sugar, fuel, gas, motorcycles and imported motor vehicles is set to increase. This is after the Government imposed new taxes in measures aimed at discouraging imported commodities and to raise money to fund the Sh2.2 trillion budget.
The IMF-World Bank joint note also proposes that Kenya finds new mechanisms of funding its huge infrastructure projects that are devoid of debt.
The institutions argue that Kenya should also explore innovative funding mechanisms, including public-private partnerships and assesses how any new programmes and projects will be incorporated into the Government’s medium-term expenditure framework.