The country’s debt, which hit Sh7.12 trillion by last September is projected to double in the next nine years, says the latest Parliamentary Budget Office report. By 2030, it is estimated Kenya’s debt could account for more than 100 per cent of gross domestic product (GDP), which refers to the monetary value of all finished goods and services expected in the country by then. “In the current financial year, debt is forecasted to reach Sh7.8 trillion and will account for approximately 69 per cent of GDP and 87 per cent of the total debt ceiling. Indeed, the debt stock is projected to double by June 2030 and could account for over 100 per cent of GDP,” the report states. And on the eve of President Uhuru Kenyatta’s final year in office, debt service (debt principal and interest payments) will cross the Sh1 trillion mark in the 2021/22 financial year and will be domestically driven.
Sh1trn debt repayment
According to the report, debt repayment, estimated at Sh925 billion in 2020/21 financial year, will reach Sh1.023 trillion by the end of the 2021/22 financial year. “To manage this situation, lengthening the maturity of existing securities may be necessary even though this will transfer debt to future generations,” states the PBO’s report on budget options for 2021/2022 financial year and the medium term. The Sh7.12 trillion debt chalked up by last September accounts for 65.6 per cent of GDP and 79 per cent of the statutory debt ceiling of Sh9 trillion.
Titled ‘Evading Recessionary Pressure Under a Mounting Debt Burden,’ the report blames the piling loans on expenditure pressures related to infrastructure and debt servicing coupled with decline in revenue generation. “This trend is projected to continue over the medium term as the expansionary economic blueprint, the need for fiscal stimulus and debt servicing obligations continue to drive expenditures even as revenue generation remains low and the economy continues to underperform,” the report adds. As a consequence of the poor economy, the report cites closure of many companies over the past two years.
Companies shut down
At least 388 companies shut down in 2019, according to the Registrar of Companies. The country’s foreign direct investment declined by Sh31 billion in 2019 and is estimated to have shrunk by 40 per cent last year. “Concerns with regard to debt accumulation, particularly among investors, may also lead to loss of access to cheap external markets,” the report cautions. Parliament budget experts also caution guaranteed debt is a significant risk to the country’s debt position. As of June 2020, guaranteed debt amounted to Sh165.2 billion, reflecting a 276 per cent increase since June 2015. This increase is as a result of increase in commercial debt — Sh79.9 billion (guarantee provided to Kenya Airways) and bilateral credit Sh80.6 billion (guarantees to capital projects undertaken by KenGen and the Kenya Ports Authority). The report observes the Sh9 trillion statutory debt ceiling has been weak in controlling the borrowing spree as it is “not considered a sustainability indicator but a legal limit.” “It is a numerical limit, arbitrarily set, and delinked from macroeconomic factors that determine the debt-carrying capacity of a country, alongside other factors. Furthermore, it limits the regulatory role of the public debt management office given that there is a single regulatory parameter, which is already fixed. Choice of ceiling will promote transparency and use of better sustainability measures.”
Tackling cash crisis
Among proposals to tackle the cash crisis are: a freeze on new projects; rescheduling debt to free more money to finance expenditure in the budget and cutting down on unnecessary spending by state corporations; public servants should continue working from home; government to encourage shift to online platforms for meetings and increase development expenditure financed through external resources. The policy options to address the runaway debt include the government to stop domestic borrowing and an increase in concessional financing. By taming domestic borrowing, it will slow down debt growth and concessional external debt will be used to replace or buy out expensive domestic or external debt. Parliament budget experts also propose that medium term debt service expenditures must be reduced to no more than 3.4 per cent of GDP. Targeted reduction of debt servicing expenditure alongside reduction of non-core recurrent expenditures will have a higher effect of easing fiscal space.
Revise debt ceiling
The report also recommends the revision of the arbitrarily set debt ceiling, arguing that as designed, it creates a regulatory flaw as it is delinked from the rest of the economy. Choice of a ratio would provide a debt limit that is more responsive to both liquidity and solvency concerns and lead to prudent debt management practice.
But it is not all gloom.
The report projects the economy is estimated to grow by 0.5 per cent in 2020, increasing to 1.3 per cent in 2021 and 4.3 per cent in 2022. This is based on the prevailing circumstances and assuming no significant change in policy. Risks to economic growth include how long the Covid-19 pandemic will take to resolve. “Even though successful vaccine trials have been reported by several pharmaceutical companies, how effective they are in bringing the pandemic to an end will depend on a number of factors,” the report cautions. There are concerns about acceptability in some regions due to fear mongering as well as challenges in scaling up production and distribution of the vaccine on a global scale.
Covid-19 vaccines availability
“Already, equity concerns are emerging in terms of who gets the vaccine first and at what cost, with concern that these vaccines may not be available to developing economies at least until end of 2021.” Political uncertainty due to election fever that has set in rather early in the Building Bridges Initiative (BBI) referendum campaigns as well as various by-elections. “History has shown that economic growth tends to be muted during electioneering periods. This is attributed to a rather challenging business environment and a wait and see approach by investors pending the outcome of the elections. Thus the political environment will continue to be a key driver affecting growth until end of 2022.” Other factors that could affect growth are erratic weather patterns and corruption.
On universal health coverage, the report urges authorities to make it mandatory for Kenyans aged between 18 and 65 years to be enrolled under the National Hospital Insurance Fund (NHIF) social insurance scheme. It recommends that the elderly (above 65 years) and vulnerable persons be supported by the government to enrol under the NHIF cover through a yearly government supported capitation. On social safety net programmes, the report proposes that the cash transferred through the “Inua Jamii” programme for the financial year 2021/22 be increased by Sh6.5 billion to compensate for further loss of income to beneficiaries