Ideas & Debate

Kenya’s fiscal missteps must be corrected without delay

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Treasury Building: There is a need for a candid assessment of Kenya’s borrowing. FILE PHOTO | NMG

Last week, the International Monetary Fund raised Kenya’s debt distress warning level from low to moderate. This is partly informed by the rapid increase in debt levels as well as Kenya’s breach of debt sustainability measures such as the external debt service to both the export and revenue ratios.

There are three factors to bear in mind as one assesses Kenya’s public debt and general fiscal path. The first is that Kenya’s public debt is understated because it is not clear the extent to which official figures factor in debt accrued by county governments.

For example, the County Government of Nairobi alone is said to have a debt of Sh57 billion.

Bear in mind, county governments tend to borrow from commercial banks with high interest rates and shorter loan tenures.

At the moment there is no clear documentation on the scale and terms of county government debt.

This makes it difficult to systematically ensure that all debt owed by county governments are reflected in official public debt figures.

Thus, at this stage, it is safe to surmise that Kenya’s debt distress levels are more onerous than official figures suggest and that national debt figures understate the scale of total public debt owed.

Secondly, the government has a chronic problem with revenue generation. In late October, the government cut the revenue projection downward by Sh96 billion for FY 2018/19 and by Sh42 billion for 2019/2020.

Revenue targets are only revised downwards when it is clear that the original target cannot be met. The reality is that the Treasury continues to accrue debt while knowing the government is not generating enough revenue.

This alone makes it clear that Kenya’s fiscal path is not sustainable.

The irony, however, is that the Kenya Revenue Authority just released a report indicating that Kenya may have lost up to Sh270 billion in tax over the past three years due to tax exemption provisions.

It is in the interest of the government to better coordinate expenditure with sustainable revenue generation that does not stifle economic growth.

Though slower, developing a shrewder tax regime that actually stimulates business activity would be better in the long term rather than slapping a new VAT on a basic commodity such as fuel, as this increases the cost of doing business and production, which have negative effects on profit margins and thus taxes paid.

Finally, government at both national and county levels continue to fail to pay their suppliers; this is leading to fiscal problems.

As of July 2018, the government was said to owe SMEs Sh200 billion.

The failure to pay for goods and services rendered is not only morally abhorrent, it is crippling the ability of SMEs to remain commercially viable.

As a result, the affected SMEs are making losses, which then translates to lower (if any) tax payments.

So again, government behaviour is causing problems for itself.

Kenya’s fiscal problems are becoming structural in nature.

The concern is that the fiscal structure is unsustainable.

One wonders at what stage the seriousness of Kenya’s fiscal pains will be comprehensively addressed so as to mitigate the negative fiscal momentum being generated.