Letters

Kenya should cut capital-intensive spending to tame debt

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Ongoing construction of the Nairobi Expressway is a recent example of capital-intensive projects undertaken by government. PHOTO | JEFF ANGOTE | NMG

Summary

  • It is clear that the country is grappling with high public debt levels, a situation that raises a red flag on medium and long-term public debt sustainability.
  • As of the end of June 2016, total public debt stood at Sh427.6 billion; external debt service stood at Sh78.6 billion or 12.8 percent of the total value of the country’s exports.
  • We have a bigger and some would argue a bloated system of Governance that includes just over 500 elective and nominated positions.

The Treasury has released a draft 2022 budget policy statement titled Accelerating economic recovery for improved livelihood.

Notable in this report is the mention of efforts to cut the fiscal deficit from the estimated Sh1.1 trillion in the 2021/22 budget to Sh846.1 billion, 43 percent of which will be funded through foreign debt.

In September, the same ministry released an annual public debt report for the 2020/21 fiscal year with estimated debt service at Sh780.6 billion, making up 50 percent of the estimated total tax revenue of Sh1.56 trillion, compared to Sh651.5 billion or 41.4 percent of tax revenue in 2019/20.

It is clear from these two reports that the country is grappling with high public debt levels, a situation that raises a red flag on medium and long-term public debt sustainability.

To put this into context, one needs to analyse trends in the country’s fiscal position over a period of time, say more than the last five years. That is review Government expenditure, revenue and deficit financing.

As of the end of June 2016, total public debt stood at Sh427.6 billion; external debt service stood at Sh78.6 billion or 12.8 percent of the total value of the country’s exports where the country derives the biggest proportion of its foreign currency inflows.

This is a stark comparison with 34.4 percent in 2020/21.

What has been the impact of Government expenditure on the economy as measured by GDP?

To begin with, we have a bigger and some would argue a bloated system of Governance that includes just over 500 elective and nominated positions, leading to a huge wage bill.

In addition to this, we have borrowed heavily to invest in capital-intensive infrastructure projects with arguably minimal impact on economic activity and wealth generation.

While it is true that Covid-19 has had a negative impact on the country’s fiscal position, it has only exposed the frailties of an economy struggling to generate wealth for its population.

Wealth, in this case, is economic growth as measured by GDP, which is the aggregate of government spending, household consumption, investment and the difference between the country’s exports and its imports.

Prudent spending

Government is the main driver of economic growth with minimal contribution from the private sector.

While the Government struggles to raise its revenues, the same cannot be said of how it attempts to contain its expenditures.

We can effectively conclude that the economy has been operating well under full capacity for the last two or three years and this will be the case for the next two or three also taking into account the impact of the general election on investment.

The most obvious choice the country has to make is to adopt prudent spending habits which involve a reduction in capital-intensive infrastructure spending in favour of more sustainable projects that create wealth for a wider segment of the population.