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Pain for Kenyans as Treasury borrows Sh1 trillion in one year

BUSINESS
By Dominic Omondi | July 18th 2021

Treasury Cabinet Secretary Ukur Yattani. [Edward Kiplimo, Standard]

The National Treasury has borrowed over Sh1 trillion in a single financial year, which experts say is likely to hurt ordinary Kenyans if it continues.

By end of June, Kenya’s total public debt had surged to Sh7.71 trillion, an increase of Sh1.02 trillion from Sh6.69 trillion in the same month last year, data from the Central Bank of Kenya (CBK) shows.

This means the government has been borrowing on average Sh2.8 billion per day.

Since March last year when the country recorded its first case of Covid-19, the government has borrowed Sh1.43 trillion.

Treasury has argued that elevated borrowing since March last year reflects the tough conditions brought about by the Covid-19 pandemic, which reduced State revenues.

However, critics point fingers at corruption and wastage that have contributed to a bloated expenditure, which has then translated into binge-borrowing.

University of Nairobi economics lecturer Samuel Nyandemo said that faced with a pandemic, Treasury should have frozen some of the expenditure, particularly the huge capital outlays such as on roads, and prioritised spending on healthcare.

“If you are faced with such a challenge, what you do is suspend other obligations and focus more on the immediate priority that is healthcare,” Dr Nyandemo told Sunday Standard.

He said continued borrowing makes Kenya live beyond its means and suffocates the meagre revenues that should have been used to cushion the country.

Slightly over half of the country’s public debt, Sh4.01 trillion, is foreign loans largely from multilateral lenders and sovereign bonds such as the Eurobond

The remaining Sh3.7 trillion is domestic, which the government gets largely by issuing Treasury bills, short-term government debt, and the longer-term Treasury bonds.

Treasury Cabinet Secretary Ukur Yattani. [Edward Kiplimo, Standard]

President Uhuru Kenyatta’s government has now borrowed Sh5.82 trillion in eight years since 2013.

This is nearly five times what former President Mwai Kibaki borrowed in 10 years - Sh1.2 trillion - from June 2003 when he read his first budget to June 2013. 

President Kenyatta insists that most of the borrowed money has been used to grow the economy, reflected in the expansion of the country’s gross domestic product (GDP), or the measure of the national cake, from Sh4.3 trillion in 2012 to Sh10.3 trillion by end of last year.

Infrastructural projects including roads, railways, seaports, airports, power projects and dams are some of the major beneficiaries of the borrowed trillions.

In his Madaraka Day Speech in Kisumu on June 1, Uhuru sought to defend his economic legacy, noting that Kenya had a GDP of about Sh6.4 billion at independence in 1963.

“After 74 years of colonial occupation, this is what Kenya was worth every year,” he said Kenyatta, adding that the combined administrations of Jomo Kenyatta, Daniel Moi and Kibaki would, in a span of 50 years, increase this national cake to Sh4.5 trillion.

“But in only eight years, my administration has doubled what the colonisers and the first three administrations did in 128 years,” Uhuru said.

“Our national cake, or our annual worth as a country every year, is now at Sh10.3 trillion. Even if you factor in inflation, our economic acceleration programme has multiplied what the founding fathers left in our custody.”

Inflation is the overall increase in the prices of goods and services. To get a true picture of the size of the economy, economists tend to adjust for inflation to get what is known as real GDP.

Government critics, however, say the infrastructure-driven growth has not trickled down to ordinary Kenyans, with CBK Governor Patrick Njoroge at some point saying that Kenyans “cannot eat GDP”.

Treasury Cabinet Secretary Ukur Yattani. [Edward Kiplimo, Standard]

Nyandemo argues that increased borrowing has meant high debt service, with a big chunk of tax revenues going into payment of interest rather than to critical public services such as education, health and security.

After years of ratcheting up debts at a faster rate than the country’s economic growth or tax revenues, the Covid-19 pandemic found Kenya in a precarious position.

Fight pandemic

With some of its key foreign exchange earners such as tourism, exports and aviation battered by the global health crisis, and a lot of workers rendered jobless, the government - like many others in Sub-Saharan Africa - struggled to respond to the negative effects of the pandemic.

Even as it gave individuals and businesses tax relief, the government was also forced to increase its borrowing to turbo-charge an economy that contracted for two consecutive quarters.

Besides the Big Four Agenda projects of job creation, universal healthcare, food security and affordable housing, the borrowed money also went into paying part of the pending bills and value-added tax (VAT) refunds and cash transfers to the elderly, women, youth and person with disability.

Additionally, the funds, particularly from the World Bank and African Development Bank, were used to fight the pandemic such as purchasing personal protective equipment and testing kits, and now Covid-19 vaccines.

However, with the country’s debt default risk estimated as high in a joint study by the World Bank and International Monetary Fund (IMF), Kenya was forced into a three-year programme with the latter aimed at addressing the debt vulnerability by increasing tax revenues and reducing spending.

The government committed to the IMF that it would target a budget deficit - the hole that is left when the spending exceeds the tax revenues - at not more than 8.7 per cent of GDP in the financial year.

Treasury was thus expected to borrow Sh898 billion, 8.6 per cent. But it widening the hole.

In April, it presented the first Supplementary Budget the National Assembly, which pushed up the deficit to 9.3 per cent, with Treasury now expected to borrow Sh1.044 trillion.

Treasury Cabinet Secretary Ukur Yattani. [Edward Kiplimo, Standard]

Meanwhile, the target for Kenya Revenue Authority (KRA) was reduced to Sh1.594 trillion from the original Sh1.633 trillion.

Total spending went up to Sh2.89 trillion from the initial estimate of Sh2.79 trillion.

And it did not end there. On the eve of his Budget Speech in June, National Treasury Cabinet Secretary Ukur Yatani presented the second mini-budget that increased the fiscal budget as a fraction of the GDP to 9.4 per cent as it was clear that KRA would not collect Sh1.594 trillion in taxes.

Instead, the country was to increase its borrowing by Sh5 billion to Sh1.049 trillion.

There was a slight cut in spending this time, which declined to Sh2.866 trillion with public universities among the main casualties.     

The National Assembly Budget and Appropriations Committee, while approving the changes, expressed concern that the budget deficit remained high compared to the original budget estimate of 7.5 per cent.

“It is noted with the exception of an additional Sh6.49 billion for the provision of Covid-19 vaccines, many of the additional supplementary expenditures are not Covid-related,” read the committee’s report.

It expressed doubt that the revised tax revenue target of Sh1.469 trillion would be better, given the continued under-performance of the economy.

However, KRA has since surpassed the target to collect Sh1.544 trillion by end of the 2020-21 financial year.

But this was after the taxman’s collection target was reduced by Sh164 billion.

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