State in a fix on lowering cost of living amid effort to reduce debt

A supermarket attendant stocks cooking oil at a supermarket in Kakamega town. Prices of most basic items are at record high. [Mumo Munuve, Standard] Over the past few days the government has been on the defensive in response to broad concern over the high cost of living. This comes in the wake of a biting cash crunch that has delayed the salaries for public sector workers in both the national and county governments, leaving the State scrambling for explanations. "Yes, it is the first time we are having delayed salaries," said President William Ruto early last week. "But it is also the first time we are having such monumental debt. I want to assure the country that that is managed and we have turned the corner." He said the government was working on solutions to the economic pain felt by most Kenyans and that policy interventions were running their due course. "We have moved our fiscal deficit to 5.7 per cent," the President said. "Our target is to take it to five per cent next year and 4.4 per cent the following year so that we can work within the parameters of the resources that we can raise as we grow our own tax revenue." Recurrent expenditure "We will not continue the old tradition of borrowing money to pay recurrent expenditure, salaries. We are going to pay salaries from our own resources." Data from the National Treasury shows Kenya's public debt stood at Sh9.1 trillion at the end of December 2022 against a statutory limit of Sh10 trillion as per the Public Finance Management Act (National Government) 2022. This comprised of Sh4.6 trillion in external debt and Sh4.4 trillion in domestic borrowings. In the 2021-22 financial year, the government had sought to borrow Sh678 billion from the domestic market and Sh343 billion from the external market. However, it cut borrowing to Sh732 billion, 30 per cent below the Sh1 trillion projected budget deficit. "External commercial borrowing was not actualised due to elevated yields in external capital markets while the shortfall in domestic borrowing was as a result of tightness of liquidity in the economy," said Treasury in the latest debt management policy brief. The shortfall of more than Sh289 billion in the projected expenditure has meant an unprecedented cash crunch at both the national and county levels of government with development expenditure the worst hit. Scaled down "The Sh910 billion worth of projects that were already in some form committed we've scaled down," said Ruto. "We have shaved another Sh250 billion out of that so that we can stagger the projects, deliver on the ones that are immediate, already started and rolling and then do the others later because we have to live within our means." Data from the Controller of Budget indicates that government expenditure on development projects fell by Sh27 billion in the first six months of the 2022-23 financial year. This has constrained cash flows to contractors working on projects for the national and county governments, leading to frustration across much of the private sector. Earlier this month, the World Bank painted a mixed outlook on the performance of Kenya's economy based on the prevailing high interest rates and resilience in major sectors. "Kenya is expected to grow at five per cent in 2023 (down from 5.2 per cent in 2021) and set to expand at 5.2 and 5.3 per cent in 2024 and 2025, respectively," said the World Bank. "The slowdown in economic activity in 2023 is attributed to a deceleration of growth in private consumption associated with the impact of higher interest rates that are aimed at curbing inflation." The bank projects that growth in private consumption is set to decline marginally to five per cent for the rest of this year, from 5.2 per cent in 2022 with investments growing 7.7 per cent compared to seven per cent in 2022 despite the current rate tightening. Piling of debt "On the production side, growth in Kenya reflects strong increases in activity across all sectors in 2023-with growth accelerating to 3.8 per cent in agriculture and 4.9 per cent in industry," it said. "Growth in services will remain resilient, at 5.4 percent in 2023, although down from 7.5 percent in 2022." However, Kenya's piling stock of public debt means the government is left with little room to manoeuvre. This places the country at a precarious position, particularly with a looming Sh280 billion Eurobond payment that is due next year. According to the International Monetary Fund (IMF) Kenya ranks third in the world behind Ghana and the Democratic Republic of Congo in the value of outstanding loans from the global lender this year. At Sh105 billion in outstanding loans as at January 2023, Kenya is behind Ghana (Sh132 billion) and the DRC (Sh118 billion) in the value of outstanding loans. Reducing the borrowing ceiling in an atmosphere of depressed economic activity and revenue collection without starving the national and county governments of resources to run their activities is ambitious, to say the least. Last week, Central Bank of Kenya Governor Patrick Njoroge said the government is expecting Sh35 billion in syndicated loans this month and a Sh140 billion budgetary support loan from the World Bank in May. This is expected to compensate for the Sh168 billion in external facilities the country missed out on last year. The IMF has, however, cautioned that Kenya and other developing countries cannot continue to kick the can down the road in the prevailing economic conditions. "Our sense is that about 97 per cent of countries with an inflation target, almost everybody will miss by a large margin in 2023 and even in 2024," said IMF Head of Research Daniel Leigh. "It's not until 2025 that we'll probably know that we are closer to landing." With the higher interest rates and the lower growth and also the stronger dollar, a lot of the countries that have borrowed in dollars are finding it harder to repay "and our estimate is that about 60 per cent of low income countries are at debt distress or high risk," Mr Leigh said. "That means default and about 25 per cent of emerging markets economies are also at very high risk so we could see a wave of defaults, restructurings. These are risks that the international community needs to prepare for." According to Leigh, underlying inflation remains persistent and is plateauing in many countries instead of coming down. "We need to bring down these debt levels. One technique is raising taxes and cutting spending; austerity but this alone won't be enough," he said. "In many cases they will also need to consider renegotiating or restructuring their debt."

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