Opinion & Analysis

EDITORIAL: Rapid accumulation of public debt unsustainable

The National Treasury building in Nairobi. Kenya has in the past four years borrowed billions of shillings to finance power generation and road construction projects. FILE PHOTO | NMG
The National Treasury building in Nairobi. Kenya has in the past four years borrowed billions of shillings to finance power generation and road construction projects. FILE PHOTO | NMG 

The rate at which Kenya is chalking up public debt is, once again, raising eyebrows.

With records showing that public debt crossed the Sh4 trillion mark by end of first quarter, and tax collection growth still sluggish, the country is no doubt at a high risk of debt repayment stress in future.

The new total public debt loosely translates to a loan burden of Sh86, 957 on the shoulder every Kenyan, including children.

The Treasury’s records show that in just 12 months to March, Kenya accumulated additional Sh782.3 billion in public debt.

That whole heap is now equivalent to 52.6 per cent of the gross domestic product (GDP), with more than half of loans or 51.9 per cent coming from foreign entities.

If foreign control does not scare enough, the fact that principal sum and interest charge on external loans must be paid in hard currencies should trigger alarm bells.

Without doubt, the rate of growth of debt could see the country slowly slide into a cyclic problem. 

Increased demand for foreign currencies to service loans weaken the shilling, further pushing up the cost of loans and imports.

The negative fiscal impact is observable in 2016/17 financial estimates when the Treasury allocated Sh250.8 billion to cover interest payment, higher than the Sh215.7 billion for the principal sum.

The big picture is that the government has been taking a gamble.  Most of the projects that have driven up public debt have long payback periods.

Loans have also financed short-term administrative costs and repayment of old debts. The result? Kenya has become vulnerable to external shocks to the extent that its rate of loan accumulation continue to outpace the country’s economic growth and revenue collection efforts.

It is unhelpful for the Jubilee administration to continue taking solace in the fact that public debt remains close to the official red line of 50 per cent of GDP.

Rapid accumulation of debt is a sure path to financial ruin and this trend must be reversed. One way out is for the government is to live within it means. It must walk its talk in cutting public expenditure.