advertisement
Columnists

Maintain balance between fiscal policy, debt level

Over the years the electorate has fulfilled its civic duty of electing leaders. Key among the expectations of the common mwananchi is that elected leaders formulate and implement policies that improve their general well-being.

This is mainly achieved through the creation of job opportunities, reducing the cost of living, improving business operating environment among other initiatives.

Each successive government finds itself between a rock and a hard place as it balances between fulfilling its mandate within its time in office and ensuring that the same is sustainable and scalable over the long-term.

Key policies that ensure that the various initiatives started have a long-term positive effect to the citizenry is keeping both internal and external borrowing at a sustainable level.

The current government is no exception and has embarked on an expansionary fiscal policy to accelerate economic growth to seven per cent in the medium term and eventually to 10 per cent as envisioned in Vision 2030 blueprint.

advertisement

This comes with a requirement that substantial amount of resources are employed to spur economic activity.

Modernisation of tax system has led to a great improvement in the taxes collected by the Kenya Revenue Authority (KRA) over the years.

In an effort to bridge the gap between the revenue collected through taxes and the budgeted expenditure, the government has resorted to both internal and external borrowing.

The Gross Domestic Product (GDP), a monetary measure of the value of goods and services produced in a country in a specific period, was revised in line with global standards.

This involved the change of the base year from 2001 to 2009 as well as adjusting for the various structural and economic changes that have taken place over time.

The GDP was revised to Sh4.76 trillion up from Sh3.8 trillion in 2013/14 after the rebasing. This led to reclassification of the country from low income to lower middle income status.

External debt carries with it inherent risk such as local currency volatility leading to changes in the cost of the debt. The government went all out and entered the global financial market with the issuance of a Eurobond worth $2 billion.

It has continued to tap into the bond issuance. The financing of the much touted Standard Gauge Railway (SGR) project has also mainly been financed by external lenders.

This has led to a considerable rise in the country’s external debt level. The recent depreciation of Kenya shilling vis a vis the US dollar will ultimately raise the cost of all external debt which is dollar denominated such as the Eurobond.

As the government progressively borrows on commercial terms as opposed to concessionary terms it should put into consideration the expected rise in cost of servicing these loans.

The writer is a senior tax consultant at Ernst & Young. The views expressed herein are not necessarily those of EY.

advertisement