The Sh1.8 trillion debt headache for Uhuru government

Kenya’s domestic debt has touched the trillion-shilling mark, tightening the fiscal space for the Jubilee government as it seeks finances to fulfil its election promises.

The government’s borrowing from the local markets rose by 16.4 per cent in the past nine months to stand at Sh1 trillion at the beginning of April, according to the latest data from the Central Bank of Kenya.

“Gross government domestic debt increased by Sh141.4 billion to Sh1.0 trillion on April 5, 2013, from Sh858.8 billion at the end of June 2012,” the CBK says in its weekly bulletin.

It is the first time ever that Kenya has borrowed this much at home and with an external debt load of Sh800 billion takes the total national debt burden to a high of Sh1.8 trillion or half of the Sh3.6 trillion economy.

A heavy public debt burden leaves President Uhuru Kenyatta in a tight budget position casting a dark shadow over his economic agenda, whose details are expected this afternoon in his inaugural speech Parliament.

The government’s financial position has deteriorated in recent times with the slowdown in economic activity in the run-up to the March 4 election leaving the taxman far off the revenue targets.

(Read: Kenya’s new president to inherit a broke Treasury)

President Kenyatta’s government takes office with a multi-billion-shilling spending plan that includes removal of maternity fees from all public hospitals and the scrapping of access fees charged in dispensaries and health centres.

Mr Kenyatta has also promised to give all children joining public primary schools next year a solar-charged laptop — a plan that is expected to add at least Sh10 billion to the budget.

The challenge for the Jubilee government is that it must balance the delivery of its promises with equally budget bursting demands of the Constitution — which has established a devolved system of government and gives the county units the right to a share of the national revenue.

As he sets his economic agenda Tuesday afternoon, the narrow fiscal space will weigh heavily in Mr Kenyatta’s mind.

Three options are available to the Jubilee coalition’s success in running a government that will deliver on its promises to the electorate while maintaining a fiscal balance that is required for long term growth.

Mr Kenyatta could calibrate the growth of the debt if he wins a large amount of donor support for some of his economic programmes. He could also opt to increase taxes to get the money he needs to invest in the economy to secure long term growth or he could simply renege on some of the budget bursting promises in his party’s manifesto.

(Read: President Uhuru faces a crowded business agenda)

The steep rise in the domestic debt means Kenya must spend more to service the loans ultimately increasing the government’s recurrent expenditure and crowding out the development budget.

“That kind of debt must be serviced and that is going to eat up our revenues and ultimately impact on delivery of the election pledges,” said Samuel Nyandemo, an economics lecturer at the University of Nairobi.

The Treasury has paid a total of Sh81.7 billion in interest and other charges on domestic debt since the beginning of the current financial year. The payments are Sh24 billion higher than cumulative interest paid on public debt for a similar period of the last fiscal year.

Official government data shows that interest paid out so far includes the Sh2.2 billion overdraft that the CBK offered the Treasury last year. The Treasury has maintained the overdraft at maximum point of Sh25.4 billion for the last 8 months.

Kenya’s foreign debt stood at Sh833 billion in January pushing the public debt burden to Sh1.8 trillion or 48 per cent of the GDP.

Some analysts described this level of debt as manageable saying the key determinant remains what use the Kenyatta government will make of any money borrowed.

“Looking at it from the GDP perspective it is still comparatively low. The government still has room for more debt especially on the external front which they can now get at better prices after the peaceful elections,” said Alexander Muiruri a fixed income analyst at African Alliance.

Most analysts however believe that any further borrowing on the domestic front risks crowding out the private sector from debt market as banks change course to put their money into government securities that are risk free and yield high returns.

Banks hold 51 per cent of the Sh938.4 billion Treasury bills and bonds so far issued. Some analysts maintained that the Jubilee government must give its domestic borrowing policy a hard look in order to ensure that the local manufacturers, whom it has promised to favour during its procurement processes, access financing.

“Increased government borrowing from the domestic market gives the banks an alternative risk free avenue for lending translating to higher loan premiums for the private sector,” said Ashif Kassim a managing partner at audit firm RSM Ashvir.

The Treasury is expected to issue five year and 25 five year bonds worth Sh25 billion next week when the lenders are also expected to price their money higher.

To avoid this, some experts believe the only other alternative is to increase taxes to cover the financing gaps that will emerge from the government’s ambitious development and social agenda.

“They will need to increase revenues through tax increases that can only be counterproductive. The best way is to look at what is being wasted and divert it to these promises,” said Nikhil Hira a partner at Deloitte and Touche.

“High tax burden is usually an incentive for tax evasion,” he said.

Mr Hira noted that President Kenyatta needed to reintroduce the VAT Bill in his maiden speech, a bill which if passed and implemented should earn the Treasury an estimated Sh11 billion before end of financial year.

The bill was time barred in the last parliament as legislators put emphasis on constitution and election-related bills. The revised VAT bill cuts the number of exempted goods which were too many to the detriment of revenue growth.

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