Columnists

Kenya headed to a public debt crisis

debt

It is now clear that Kenya is headed straight into debt crisis headwinds, and it's an appointment it cannot avoid. FILE PHOTO | NMG

Summary

  • To show the kind of careless and unconscious public servants we are dealing with, the Treasury has revised its borrowing numbers this financial year from Sh800 billion to Sh1 trillion to cover the tax revenue shortfall that is expected.
  • They have simply decided to bury their heads in the sand and continued piling debt on the already overwhelmed taxpayer.
  • To make sense of the magnitude of Sh1 trillion that Treasury plans to borrow this year, that is 10 percent of Kenya's GDP borrowed and spent in one year, or almost 70 percent of what the KRA collects in total taxes.

It is now clear that Kenya is headed straight into debt crisis headwinds, and it's an appointment it cannot avoid.

Kenya's debt servicing cost to export ratio has crossed the IMF-recommended threshold of 21 percent for the first time. A third of its total debt is made up of commercial debt such as Eurobonds and syndicated loans. So, the burden of servicing these debts that are dollar-dominated from dollar exports is becoming a burden after crossing the recommended threshold. In short, the country's debt sustainability in the short-term is off track.

For a period of time now, many of us have raised concern about the terms and structure of Kenya's debt portfolio, but we have been dismissed by the Treasury as being alarmist for no reason. The Treasury insists that Kenya's debt sustainability is much within manageable levels.

To show the kind of careless and unconscious public servants we are dealing with, the Treasury has revised its borrowing numbers this financial year from Sh800 billion to Sh1 trillion to cover the tax revenue shortfall that is expected.

They have simply decided to bury their heads in the sand and continued piling debt on the already overwhelmed taxpayer. To make sense of the magnitude of Sh1 trillion that Treasury plans to borrow this year, that is 10 percent of Kenya's GDP borrowed and spent in one year, or almost 70 percent of what the KRA collects in total taxes.

The other aspect is that, as the Kenya shilling continues to weaken against the dollar, Kenya does not only add more than Sh30 billion to its overall public debt from its dollar-dominated foreign debt portion but the interest of dollar-dominated loans also increases.

So, the weakening of the shilling against the dollar is a double whammy on our public debt and Treasury does not seem bothered by Kenya crossing the debt servicing cost to export ratio threshold.

Looking at the structure of the economy, Kenya will not be avoiding this debt crisis like the Titanic hitting the iceberg.

First, Kenya's export earnings are expected to decline even in the next financial year from 10.1 percent in 2020/2021 to 9.9 percent in 2021/2022, meaning financing of dollar-dominated debt will remain a burden on the taxpayer.

Second, remittance by Kenyans in the diaspora, which has been one of source that has provided stability to the shilling has been hit hard by the Covid-19 pandemic. The World Bank predicts that Africa will lose 23 percent of its foreign remittance earnings, which will bounce back when the global economy rebounds.

Third, foreign direct investment (FDI) is one other sources that should stabilise the shilling and also boost economic recovery post Covid-19. The UNCTAD's World Investment Report 2020 has it that developing economies are expected to see the biggest fall in FDI.

This is because they rely more on investment in global value chain (GVC)-intensive and extractive industries, which have been severely hit, and because they are not able to put in place the same economic support measures as developed economies.

FDI flows to Africa are forecast to fall by 25 to 40 per cent in 2020. The negative trend will be exacerbated by low commodity prices. In 2019, FDI flows to Africa already declined by 10 per cent to $45 billion. Investment flows are expected to slowly recover in 2022 but will be led by global value chains restructuring and replenishment of capital stock and recovery of the global economy.

So, when many of us raised the alarm about the path the Treasury was taking, it is because we were cautious and conscious of Treasury leaving the taxpayer in a precarious position and exposing the country to a debt crisis and an economic disruption. Unfortunately, the disruption came in its worst form — a global pandemic that has a demand and supply effect on the economy.