Debt binge leaves Kenya’s economy on the Cliff



If you look only at the topline numbers of Kenya’s economic agenda for the new financial year as per the budget read by Treasury Cabinet Secretary Henry Rotich mid-June, the country looks set for a massive take-off in its growth ambitions. This clearly gives President Uhuru Kenyatta gigantic mileage from a legacy perspective and is good optics for his deputy, William Ruto who is angling to ride on Jubilee’s economic plan to succeed his boss in 2022.

But that’s where the relatively positive story ends. When and if the pipeline of projects is successfully rolled out as planned, Kenya will be left cripplingly indebted with a repayment burden that will determine the country’s future economic prospects. And so is the story across many third world economies. As argued elsewhere in the edition, East Africa’s finance ministers simultaneously presented their countries’ 2018/19 budgets on June 14, with a common theme emerging across the region: not a single country in East Africa can fund its own budget fully.

Kenya’s 2018-2019 financial year budget of Sh3 trillion shows that only 76.2% of the budget—Sh1, 949.2 billion— will be financed via revenue collections while to fund the balance, the government will turn to borrowing. Effectively, the budget deficit is expected to grow to 6.7% or Sh558.9 billion. The current fiscal year budget increased by Sh400 billion from Sh2.6 trillion last year.

Economic analysts have raised fresh concerns over the level of borrowing, with Kenya’s public debt standing at Sh5 trillion. And this is expected to rise further on projected increased external borrowing. Total outstanding foreign debt stands at Sh2.563 trillion. Domestic debt, government statistics show, clocked Sh2.448 trillion in June, with the total load of borrowing expected to put pressure on the economy over the higher debt servicing obligations, including interest and principal repayments. Ordinarily, such high level of debt commitments would push the government’s recurrent expenditure higher, thereby hurting development spending, analysts at Genghis Capital, an investment bank said in a note to investors in June.

Moody’s, the global rating agency in its latest assessment on the Kenyan economy said government finances have continuously deteriorated over the last years due to eroding revenue, high development spending and the rising cost of debt.

This trend is exhibited by the increase in debt and interest payments to 56% of GDP and 19% of revenue respectively in 2017, from 41% and 11% five years ago. In February, Moody’s downgraded the issuer rating of the Government of Kenya to B2 from B1 and assigned a stable outlook. The drivers of the downgrade, the agency said, related to an erosion of fiscal metrics and rising liquidity risks that point to overall credit metrics consistent with a B2 rating.

“The fiscal outlook is weakening with a rise in debt levels and deterioration in debt affordability that we expect to continue. In turn, large gross financing needs and reliance on commercial external debt will maintain government liquidity pressures. While the government aims to improve the efficiency of spending and revenues, such measures are unlikely to be effective enough to stem a weakening in fiscal trends,” said Moody’s.

It is estimated that government debt will increase to 61% of GDP in fiscal year 2018/19 from 56% of GDP in FY 2016/17 and 41% of GDP in FY 2011/12. With the large infrastructure-related development spending announced by CS Rotich, a continued lag in revenue collection and a rising cost of debt is expected to raise fiscal deficits and keep government debt on an upward trend, with fears of worsening debt affordability.

Does the future look rosy? No. The government will continue to face liquidity pressures due to a combination of large financing needs and an increased reliance on sources of financing with less predictable costs, especially with a growing book of commercial external borrowing and short-term domestic debt, economists have warned. At least 25% of Kenyan government debt is held by domestic banks, which is mirrored in the banking sector’s exposure to the government, which represents 30% of the sector asset.

“We advise government to work towards reducing debt,” Jan Mikkelsen, the IMF resident representative to Kenya, told Parliament recently while warning that the debt is approaching “unstainable levels’.

Kenya’s first Eurobond payment of $750 million was due in June 2019, followed by a second $2 billion Eurobond maturing in 2024. A syndicated loan originally taken out in 2015 and worth $750 million was extended by six months in October 2017, with 90% of investors agreeing to extend the maturity to April 2018.

The government doesn’t seem worried of the state of affairs. “I want to assure Kenyans that at no point has the country been at risk of default,” said President Uhuru Kenyatta in March.

Kenya’s external debt continues to shift away from concessional debt toward commercial and semi-concessional debt, leading to higher financing costs. Between June 2013 and June 2017, the share of commercial external debt increased from 7% to 31% of total external debt.

“We are not doing anything strange. We can’t just enter there (international market) and disappear until we pay the loan,” CS Rotich said last month.

An increase in the stock of short-term domestic debt as a percentage of GDP also contributes to a rising interest burden, Moody’s warned. “Structural fiscal reform will be key to approaching the government’s ambitious medium-term objectives of fiscal consolidation and strengthening fiscal resilience, but are unlikely to have a material nearer-term impact on fiscal performance,” the rating agency said.

What this would mean is that Treasury will have to focus on improving the efficiency of tax collection and compliance by increasing the capacity of the Kenyan Revenue Authority (KRA) by rolling out IT-related measures, expanding the tax base through targeted measures aimed at the informal sector of the economy. CS Rotich was categorical in his budget speech that taxpayers will have to dig deeper into their pockets in this financial year, while announcing a slew of tax reforms and raised a cross section of taxes. KRA is expected to raise Sh1.7 trillion in taxes up from last year’s Sh1.4 trillion.

“The high level of public debt in Kenya narrows the window for future borrowing, and increases vulnerability to fiscal risk in the event of any urgent need for borrowing,” says the Kenya Institute for Public Policy Research and Analysis (Kippra) in its latest economic update. “Kenya’s public debt was above the EAC convergence criteria threshold of 50% of GDP,” said the quasi-government think tank.

Kenya’s match to the current debt levels has been majestic. Her dalliance with China since former President Mwai Kibaki’s regime has seen Beijing retain its top position as the top source of bilateral loans to Nairobi. China for example gave Kenya Sh520 billion in the period ending December 2017, nearly double the levels in 2015 when Kenya got KSh273 billion. Other top lenders are Japan Sh82.48 billion, France Sh62.25 billion, Germany Sh32.46 billion, and Belgium Sh10 billion, Treasury data shows.

The World Bank is wary of Kenya’s love for China loans. “Kenya still has a heavy debt burden and China’s loans can bring debt to unsustainable levels. Some of China’s loans are non-concessional, which can raise debt-to-gross domestic product (GDP) levels quickly,” the World Bank said in a statement late last year.

But China has also been commanding Kenya’s trade. According to the Economic Survey 2018, Kenya’s exports to China stood at Sh10 billion last year while Beijing’s imports to Nairobi stood at Sh337.4 billion. This translates to a trade deficit of Kshs.327 billion in favour of China.

But Kenya is not alone in this conundrum. In May, the Bank of Uganda said the rising costs of servicing the country’s $15.1 billion of debt could hit economic growth because of reduced public investment. The country’s national debt has nearly trebled in the last three years to more than 50% of the GDP with analysts warning that this was increasing the risk of default. At least 70% of this stock of debt is external.Rwanda plans to increase government spending by 15.5% in the 2018/19 fiscal year to $2.81 billion with donors expected to finance 16% of the budget and the rest coming from revenue and debt.

Moody’s said in its assessment of Tanzania’s economy that the country’s debt could rise to 43% of GDP in 2020 from 40.2% in 2017. “We expect the debt burden to remain below that of regional peers. The average maturity of Tanzania’s debt is relatively long because of a large share of multilateral, concessional external borrowing, which helps partly offset a very low revenue base and supports debt affordability,” the agency said in a statement.