When Kenya borrows to pay for infrastructure investment that can boost long-term growth, which in turn generates revenues to service the higher debt but more than 70 per cent of our budget goes to recurring expenditure.
The use of debt can be beneficial, where the economic activity generated is sufficient to repay the borrowing with interest.
But the build-up of debt over the past 10 years has been excessive, beyond repayment capacity.
It was Benjamin Franklin who said: “Rather go to bed supperless, than rising in debt.” Kenya’s external debt stands at Sh4.5 trillion, 54 per cent of it, or Sh2.45 trillion being foreign, which is rising to risky levels, higher public deficits and debt levels are not necessarily undesirable.
When Kenya borrows to pay for infrastructure investment that can boost long-term growth, which in turn generates revenues to service the higher debt but more than 70 per cent of our budget goes to recurring expenditure.
The use of debt can be beneficial, where the economic activity generated is sufficient to repay the borrowing with interest. But the build-up of debt over the past 10 years has been excessive, beyond repayment capacity. What will happen when the government fails to pay its debts?
Kenya has recorded the lowest rates of expansion (less than six per cent per annum) in the past five years — trailing its neighbours even as its debt load grew by double digits. Uganda, Tanzania and Rwanda have been growing at the rate of between five and eight per cent. The objectives of growth under Vision 2030’s Second Medium Term (MTP-2) — which include speeding up expansion to the rate of seven per cent by 2018 — can only be realised if Kenya improves governance, keeps inflation low and refines the business environment.
Foreign debt repayment is expected to become expensive as the United States Federal Reserve Bank starts withdrawing its monetary stimulus this year, thus increasing interest rates. The country will be exposed to external shocks, mainly through volatility in international financial markets. Kenya can reduce these shocks through the following strategies:-
1. Determining a sustainable level of debt. Kenya should define the level of debt which is sustainable given the country’s resources and circumstances. Indicators for assessing the sustainability levels include the debt variables to gross domestic growth (GDP), debt figures to government revenue and expenditure and other macroeconomic variables.
2. Developing the financial sector. The financial sector is used for raising public debt by use of debt instruments such as Treasury bills and bonds, which are then traded in the secondary market.
Kenya can use debt instruments for developing its financial markets.
3. Tackling the public debt overhang. Kenya has high levels of debt which is becoming unmanageable. It arises because of the high government spending, low tax levels, uncontrolled borrowing, poor economic conditions and inappropriate fiscal policies.
Kenya should sell assets that are no longer required to increase revenue for financing the government’s activities.
Concessionary debt, which is accessing loans at lower interest rates, thus reducing the cost of funds. Low-cost loans can be obtained to pay off existing expensive loans. Loan rescheduling, which requires the adjustment of the repayments on a loan such as converting the short-term loan to long-term or paying the long-term loan within a short period if long term is expensive.
4. Establishing a public debt management office. A public debt management office should be established with the responsibility of formulating policies on public debt and implementing these policies to ensure that the debt levels are within manageable limits.
It would also develop public debt indicators and provide comparisons of debt levels of a country and other countries.
5. Coordination of monetary and fiscal policies. Monetary and fiscal policies should be coordinated to achieve appropriate levels of financial development and to ensure that minimum or no conflict exists between them. A mechanism for managing any conflicts is necessary to avoid destabilising the financial markets because a well-coordinated monetary and fiscal policies may lead to a lower public debt burden.
6. Seek alternative funding for the mega projects. Kenya should find new mechanisms of funding its huge infrastructure projects that is devoid of debt as envisaged by the Vision 2030 and the Big four agenda. This may include public-private partnerships and assesses how any new programs and projects will be incorporated into the government’s medium-term expenditure framework. These alternative methods of funding will therefore gradually lower the public debt-to-GDP ratio while raising the infrastructure investment.