BY ANTONY MUTUNGA
According to the Central Bank of Kenya, the outstanding total public debt has increased from Sh1.89 trillion in June 2013 to Sh5.81 trillion as of June 2019. As a result of increased public investment and a shortfall in revenues, the IMF increased the country’s risk of defaulting on debt repayments score from low to moderate.
With the country’s debt sustainability ratio currently standing at 62%, the Government had already breached the debt threshold of 50% of the GDP. The country breached the threshold in 2016 due to increased borrowing to fund the Government’s Big Four Agenda.
In 2014, Kenya joined the ranks of a middle-income status and as a result, concessional lending has been on strict and precise conditions. Due to the move, the country’s external debt structure shifted to more commercial financing and less reliance on concessional funding from multilateral and bilateral agencies.
To avoid running out of funding and stop relying on commercial loans, which are expensive in the long run, the National Treasury proposed to amend the Public Finance Management (National Government) Regulations of 2015. The amendment included changing the debt ceiling from 50% of the GDP at net present value to an absolute figure of Sh9 trillion. In November 2019, the Government approved the change.
Having breached the previous debt ceiling, the country had been locked out of financing by foreign development agencies. In fact, according to the Government, loan agreements worth Sh419.2 billion ($4.1 billion) have already been agreed with different lenders including China, the African Development Bank, Japan, and the World Bank but are yet to be signed. However, once the President signs the new debt ceiling, this is expected to change.
In moving to acquire finance from overseas development institutions such as the World Bank, the country will have access to loans at a lower rate and with a longer repayment period. As a result, reliance on commercial financing will be reduced. Due to the interest rate cap that was signed into law in 2016, commercial institutions had reduced access to credit for local businesses and preferred to lend to the Government as the latter is risk-free and assures increased returns. As a result, Government crowded out the private sector.
However, with rate cap recently being scrapped off and the Government expecting to shift to reliance on concessional loans, credit to the private sector is expected to get a boost. In turn, this is expected to help in the growth of the economy as a whole. Additionally, the Government also proclaims that without increasing the debt ceiling, the country can’t handle its target budget deficit for the 2019/2020 fiscal year. October 2019 saw Kenya revise its target deficit for the financial year from 5.6% to 6.2%.
Despite the assurances that raising the debt ceiling is a good strategy to help the country grow, the move has signs of causing more harm than good. For instance, once the debt limit is increased, the Government is expected to increase borrowing as a way of financing its countless stalled projects. However, due to corruption and mismanagement, the projects the government has focused on have not yielded good returns.
As such, the government has moved to use more than half of its revenue collected for debt repayment. In the period to June 2019, the country has spent Sh826.20 billion, which is 55.4% of the Sh1.49 trillion revenue collected, on debt repayments. This debt accumulation means that Kenyans will continue to inherit more debt in the future with no positive changes in the state of the economy.
With an increased debt limit, government borrowing will increase causing a further increase in debt repayments. According to the Treasury, the country’s public debt service-to-revenue ratio increased from 16.5% in 2012 to 35.8% in 2017. Kenya has already exceeded the limit recommended for debt-servicing costs by the IMF whose threshold stands at 30% of revenue. With an increased debt ceiling this ratio is expected to rise to higher levels causing revenue to be used up on repaying debt rather than on development expenditure. It will result in a negative impact in terms of service delivery to the public as well as higher tax burdens.
As the government continues to borrow, concessional loans will require more strict regulations, which might result in the shift back to commercial financing. The more the government borrows at commercial rates and spends on its projects, the more it will be exposed to external vulnerabilities, which in turn will raise refinancing risks.
According to the Parliamentary Budget Office (PBO), in the case of commercial, if the country is not able to generate the targeted revenue in the short term before the return on investment is realized, then it faces a refinancing risk and this forces it to get into a debt rollover. In the long run, the move is also expected to push Kenya towards debt distress. With the country already classified as moderate, the appetite for more loans might cause its classification to be increased until it surpasses the threshold of distress.
Indeed, raising the debt ceiling will increase chances for the government to borrow more, although there is a need for a limit on external borrowing to contain world financial shocks. The government also needs to ensure they only borrow and spend on viable public projects that will match returns worth taking the loan. This will ensure it lives within its means instead of investing in countless projects only for them to end up white elephants.
To avoid shifting into debt distress, this Government needs to identify sectors that will lead to increased revenues and economic growth as opposed to the current crop of projects. To ensure that this move does not result in the circle we are currently used to, reforms and transparency will be crucial to help the nation grow and to create a better future for the young generation.