Inside Yatani’s empty briefcase: More costly loans to fill budget gaps

CS Ukur Yatani. With a hurting economy worsened by the coronavirus pandemic, he finds himself between a rock and a hard place on where to raise Sh823 billion in budget deficits. [File]

If there’s any person having sleepless nights, it’s Ukur Yatani.

The former Marsabit governor reads his first Budget today as Treasury Cabinet Secretary since being appointed in January, under very difficult economic conditions.

Kenyans are hurting due to high cost of living as most of them have been pushed out of jobs as a result of the coronavirus pandemic.

Nearly a million Kenyans have lost their jobs. Several companies have closed operations, while others are on the edge.

As tax revenue is expected to drop considerably, the government is expected to borrow more to fund operations, which will leave Kenya exposed to expensive loans.

It is a delicate balancing act.

While debate rages on whether Kenya’s stock of debt is sustainable, the Treasury is set to get the country deeper into debt to fill the gaping hole in the next financial year’s budget.

The budget deficit for the 2020/21 financial year stands at Sh823 billion, which will be plugged through borrowing from different sources, including commercial lenders. The gap in the budget at 7.3 per cent of the gross domestic product (GDP) is bigger than Treasury project at 4.9 per cent.

And the new loans that will be taken to fill this gap will make debt servicing costlier in coming years as Treasury slows down on cheaper loans and opts for expensive debt.

This will be through increase in what Treasury refers to as semi-concessional loans and slowing down on the cheaper and friendlier concessional loans, which Parliament noted would make the country’s debt servicing more expensive.

Budget deficit could widen further due to complications brought about by the coronavirus pandemic, such as decline in tax revenues that may result in more borrowings.

Expensive debt

“The Fiscal Deficit is projected at 7.3 per cent of GDP, indicating a widening scenario compared to the previous projection of 4.9 per cent of GDP due to the need to meet critical expenditure needs in the context of an economic slowdown and the ensuing revenue underperformance. The uniqueness of the ongoing crisis means maintaining a significantly low deficit may not be a priority at the moment,” said the Parliamentary Budget Office (PBO).

“Given critical expenditure needs, the government may have to allow an expanding deficit and significantly borrow in order to protect the economy from the detrimental effects of the crisis. For this reason, it is important for the budget to be adjusted in such a way that only the very important expenditures are retained while the non-core expenditure is released towards pandemic related spending.”

In its budget documents, Treasury noted that to finance the deficit, it would borrow Sh349.7 billion externally and another Sh486 billion from the domestic market.

During the current financial year, concessional loans are projected to stand at Sh242 billion. They will however decline to Sh152 billion while semi-concessional loans will make an entry into the country’s loan portfolio, with the government planning to borrow Sh124 billion in such arrangements.

Concessional loans are advanced at generous terms and interest rates are way below the commercial loans. Though the semi concessional could be cheaper than commercial loans, PBO notes that they could be more expensive and question why Treasury could not stick to concessional loans.

“A decrease in programme and concessional loans in 2020/21 financial year will be replaced by more expensive semi-concessional loans which may result in higher debt service expenditure in the medium term. Further, there is no clear definition of what constitutes a semi concessional loan,” said PBO in its report.

The National Assembly’s Committee on Budget and Appropriations noted that in addition to the budget deficit being higher than the projected 4.9 per cent of GDP, it is also higher than the “EAC convergence criteria of more than three per cent”.

The committee also notes that the government should seek moratoriums on loan repayments. This could give it room to allocate more resources to fighting Covid-19.

“Amidst the ongoing pandemic, the committee urges Treasury to commence the process of renegotiating the terms and conditions of existing loans, with a view of striking a moratorium, including having a grace period of interest and principle repayments,” the committee said.

It could also raise money through sale of its stake in companies where it has ownership, it said. “Another option is for the government to consider divesture as an alternative source of financing.”

And by borrowing Sh486 billion locally through Treasury Bills and Bonds, the government risks crowding out the private sector and hurting small businesses.

Banks tend to offer loans to government more easily especially when compared to the private sector.

In a recent report on the impact of Covid-19 to the country’s financial sector, the Kenya Bankers Association (KBA) cautioned that increased domestic borrowing by the government could reduce credit available to households and businesses, delaying economic recovery.

“The fiscal space is likely to be more constrained and the challenge for banks will be a balancing act between lending to businesses and households that have been hard hit by the pandemic, and lending to the government which is looking for funds,” said KBA.