Debt crisis jitters mount as repayments outstrip revenues

National Treasury Cabinet Secretary Njuguna Ndung'u when he appeared before the Senate standing committee on Finance and Budget on April 5, 2023. [Elvis Ogina, Standard]

Kenya’s sovereign loan repayments rose faster than collections of tax revenues last month, National Treasury disclosures show, signalling the country could be headed for a fresh debt crisis.

Treasury documents show the taxman collected taxes amounting to Sh155 billion in July against debt repayment obligations of Sh161.8 billion in the same month.

The lagging revenues against the pending urgent debt obligations highlight mounting concerns about the strength of the economic recovery and the government’s ability to sustainably service upcoming debt repayments, including the $2 billion (Sh288 billion) Eurobond.

The debt repayment shortfall of Sh6.8 billion against revenue collections came even as the State bets on the Kenya Revenue Authority (KRA) to ramp up collections to support debt servicing alongside the daily running of crucial programmes such as health and education or building new roads.

The increased debt repayments were largely lifted by dues to the Export-Import Bank of China (Eximbank), the financier of the Mombasa-Nairobi standard gauge railway (SGR).

Kenya usually pays Chinese debts twice in a financial year - every July and January - data shows. In the current financial year, the National Treasury has budgeted Sh112.38 billion to repay China’s debts, according to internal documents.

This has increased from Sh107 billion in the last financial year that ended in June.

Broadly, the government is confronted with a Sh1.25 trillion debt repayment headache in the current financial year in a move expected to pile pressure on the taxman to raise funds for servicing public debt.

There have been concerns that rising debt servicing costs are squeezing funding for economic development, hindering the Kenya Kwanza administration from implementing its development programmes.

The local currency hit an all-time low against the dollar yesterday, setting up the government for further debt servicing distress.

Fear as Kenya’s borrowing hurtles towards Greece-like debt crisis

According to Central Bank of Kenya (CBK) data, the shilling exchanged at an average of 144.4059 against the dollar – a record low. 

With the external financing environment likely to deteriorate further as global interest rates and debt levels rise, and as commitments to development assistance dwindle, KRA is expected to come into focus on how it raises more domestic resources to finance the Ruto government’s development agenda and money for repaying public debt.

The trailing tax revenues are also expected to trigger fresh jitters about a possible debt default. Kenya’s debt remains sustainable, but the country’s risk of debt distress remains high, the World Bank warned in a recent report.

Provisional data by CBK shows that Kenya’s debt stands at Sh9.686 trillion as of May this year. President William Ruto is banking on a host of new systems and radical changes at KRA, which is yet to have a substantive commissioner general to help raise revenue targets and bring more Kenyans into the tax bracket.

Even then, the taxman faces the gruelling task to raise massive revenues in the face of a slowing economy.

The World Bank, for instance, projects Kenya’s economy will expand at 5.2 per cent and 5.3 per cent in 2024 and 2025 respectively.

To avoid a financial crisis, the government could, therefore, resort to slapping Kenyans, who are already reeling from the high cost of living, with more taxes or it could opt for more borrowing amid recent signs of debt distress.

Another option would be to induce massive austerity through deep cuts on State programmes, which would further constrain the economy.

During last year’s Taxpayers Day, which is organised by KRA annually, President Ruto said it is possible to increase tax revenues by 100 per cent over the next five years as tax collections remain far below their potential.

However, experts have cautioned that raising taxes might not have the intended impact of increasing revenues and that the government should instead focus on growing the tax base. For example, they say, government should consider reducing taxes to boost businesses and the spending power of Kenyans.