Economy

Experts fault Njuguna Ndung’u economic strategy

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Prof Njuguna Ndung'u during his vetting in Nairobi on October 18, 2022. PHOTO | DENNIS ONSONGO | NMG

Treasury Cabinet Secretary nominee, Prof Njuguna Ndung’u, plans to borrow concessional loans to pay off Kenya’s expensive debts as a solution to the mounting debt crisis facing the country.

Professor Ndung’u said domestic loans consume more than a third of Kenya’s recurrent spending and getting cheap, longer-dated loans will free up budget space and allow the government to address the current high cost of living and economic woes.

He told a vetting panel Tuesday that there is a need to create fiscal flexibility that will help the country jump out of the current financial distress.

“In the short-term, the current thinking of the government and donors who are providing food relief is that we may need concessional borrowing to help us remove expensive loans, especially our domestic debt,” Prof Ndung’u said. Most concessional loans come from the likes of the International Monetary Fund (IMF) and the World Bank, but such debt has strings attached.

“This (borrowing) will then get us fiscal space to finance development expenditure. This will also help us remove the crowding out effect for everyone due to government heavy borrowing from the domestic market.”

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The former Central Bank boss hopes to mobilise more revenues without increasing taxes by focusing on ‘optimising’ collections and expanding the tax base.

Kenya’s debt increased more than four-fold to Sh8.58 trillion under former President Uhuru Kenyatta.

Analysts, however, say Prof Njuguna’s proposals look good on paper but will find it difficult to get multilateral lenders to repay Kenya’s domestic loans and lower taxes when IMF and the World Bank are calling for increases.

Mr Churchill Ogutu - Economist IC Group says it will be difficult to get multilateral lenders to foot the bill given they do not have debt exchange facilities, and it is unlikely they will initiate a new programme to run parallel to the billions they are already giving to Kenya.

Economist Robert Shaw said Prof Ndungu is short on details as to the source of the money to restructure the debt and if IMF provides such a facility it will come with very stringent conditions including higher taxes that the Treasury nominee says he does not want to impose.

Mr Nikhil Hira Partner Kody Africa LLP says Prof Ndungu is right, but he will need to be very bold to implement it against the multilateral lenders' wishes. He said the increase in tax on low-cost keg beer led to a drastic drop in VAT and corporate tax collections and that Kenya’s taxes have increased in recent years following a shift to lower tax bands.

“It is going to be difficult with the current IMF push at the centre of things, we are currently in a vicious cycle at the moment with most collections going to debt and it is difficult to have a conversation of reducing taxes. But if we want to be radical we should do it,” said Mr Hira.

The surge in liabilities left the country at high risk of debt distress, according to the IMF. The country currently spends Sh1 trillion annually to service debt. President William Ruto's administration is facing a Sh862.5 billion hole in the Sh3.3 trillion budget for the year ending June 2023.

The Treasury projects Sh280.7 billion of the deficit will be financed by foreign creditors, with domestic investors shouldering the remainder Sh581.7 billion.

Dr Ruto has since ordered the Treasury to cut the current budget by Sh300 billion to ease the pressure to borrow “because the market cannot sustain the kind of borrowing we are doing as government”.

In the year ended June 2022, the country cut foreign commercial debt by the biggest rate since its first Eurobond eight years ago.

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The stock of bilateral loans from rich countries such as China also fell for the first time in seven years, while credit from multilateral lenders grew for the fourth year in a row.

Concessional external loans from multilateral lenders such as the World Bank and the African Development Bank are on average priced at fixed interest rate of 1.75 percent, with a 35-year tenor and a grace period of up to 10 years. Semi-concessional loans mature in about 22 years, including a grace period of seven years, and come with a fixed interest rate of about 2.3 percent.

Prof Njuguna, who defended himself against allegations of malpractices in the award of Sh1.2 billion security currency tender that was awarded to De La Rue, the Sh2.8 billion sale of Grand Regency Hotel and collapse of Imperial Bank told the National Assembly’s Committee on Appointments that the country has a very serious short term financial constraints that requires immediate interventions.

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