What Kenya must do to avoid debt trap

Apparently, if a journalist writes about debt in Kenya, they run the risk of being ‘unfriended’ by Treasury. But Treasury never yet invited me to a birthday party, so I’ll bear the unfriending, for, today, I am writing about debt.

The Kenyan government, as it happens, is in a lot of debt. It is now a level of debt, which, if we transferred its equations over into the world of corporate finance, would mean the sages of banking would rule: you’re over-borrowed and at risk.

Yet, we see a lot of figures bandied about, with one active social media pundit even arguing this week that we should borrow far more, because, look, our debt to GDP is not even in the world’s Top 100.

In fact, taking debt to GDP as a measure of government financial stability is like taking debt to equity in the corporate world: it simply doesn’t show when a country is cruising into trouble, and here’s why.

First off, that pundit compared Kenya to Japan, where debt to GDP is running at 234 per cent. I won’t get into the current economics of Japan, but there are two things that are very different between Japan and Kenya.

The first is GDP itself. Japan has virtually no informal sector, so its GDP is a greater matter of records and facts than ours.

Kenya’s GDP is far more ‘estimated’, because we ‘estimate’ that a third of GDP is generated by the informal or hidden sector. Which is why, back in 2014, our GDP figures took a leap, because the ‘estimating’ changed, and with it the debt to GDP ratio.

The second difference is tax. Japan collects something over 30 per cent of its GDP in tax, which gives it the cash flow for repayments. In Kenya, we don’t even collect 18 per cent of GDP in tax, so our ability to pay for our debt servicing is based on a far smaller proportion of GDP.

And here is the huge reason why debt to GDP is a dud. It’s the same reason why financiers look at interest cover for companies and not debt to equity: it just doesn’t tackle cash flows and a body’s ability to repay.

And that is where Kenya now has trouble writ so large that those who suggest this new fuel VAT is an IMF weirdness as it tries to oppress us may not have fully computed the numbers.

Debt has to be repaid, as in, repayments have to be made. And to do that funds have to be available to make those repayments.

Those funds can be found in three ways, and our government has fully utilised all three. The first is from tax revenue.

The second is from new debt – borrowing to cover the previous cost of borrowing: a place that we have been in for now some years. And the third is by delaying other payments.

The way the third way works is that a budget allocates say Sh1 million for school books in a financial year.

The government gets the school books. But the bill doesn’t get paid, for a year, for maybe two years. So we end up with a pile of spending that is paid by tax, debt, or effectively borrowed from suppliers – for eventual payment in future.

That last ‘hidden’ debt isn’t even shown in the figures, yet ours has ballooned.

So how bad is our debt? We now are raising less tax than the cost of our recurrent spending – so that’s basics like teachers and doctors, civil servants and police salaries, medicines, and much else that cannot be covered from our tax base. And that’s before we start on all that glamourous development spending.

That’s called a debt trap, where you have to keep borrowing to pay your basic costs and debt repayments – be it officially from lenders or unofficially from private sector suppliers.

The only swift way out of it is to increase taxes. You either burden an economy with more taxes, which means it grows more slowly, or you stimulate a huge spurt of economic growth to generate more taxes. So here we are: now waiting for the growth spurt as the taxes rise. Trouble.