Kenya: Alarm Raised over Huge Public Debt as Agency Downgrades Credit Outlook

Kenya: Alarm raised over huge public debt as agency downgrades credit outlook

The first warning bells on what financial analysts and economists have described as run-away public debt was sounded a fortnight ago, when a rating agency Fitch downgraded Kenya’s credit outlook to negative from stable.

It cited a steady deterioration of the country’s public finances as the reason. The low credit rating is likely to result in higher borrowing costs because the borrower is perceived to be at a higher risk of default.

The agency said the down-grading reflected the country’s “weak revenue performance, increasing infrastructure spending and persistently high current expenditure.”

National Treasury estimates a revised budget deficit of 8.2 per cent of the gross domestic product (GDP) for the year to June 2015. This is higher than the deficit of 6.4 per cent announced last year June 2014.

The deficit is expected to widen to 8.7 per cent of GDP in the next 12 months. Widening deficit means Treasury has to increase borrowing to plug this gap. Analysts warn that the level of Kenya’s public debt as a ratio of GDP is growing too fast.

Debt and GDP ratio refers to the relationship between what a country owes against what it produces. But Treasury officials insist that the debt level currently at 49 per cent is sustainable.

Worrying trend

However, with the sharp increase of the ratio in the last few years is what signals a worrying trend. This has grown from 42 per cent to 49.8 per cent between 2012 and 2015, albeit it is still low compared to between 2000 and 2006, when the ratio was at 78 per cent and 58 per cent respectively.

The current debt ratios are based on a rebased economy where the size of the GDP was restated by 25 per cent last year, meaning that without the rebasing, the picture wouldn’t look too good. Figures from the Kenya Bureau of Statistics show that the country’s budget deficit has been spiraling out of control – from a low of Sh188 billion in 2010 to a high of Sh412 billion in 2014.

As of June 2015, excluding the expenditures related to a Standard Gauge Railway (SGR) project, Treasury Cabinet Secretary Henry Rotich said overall deficit would increase to Sh426 billion.

The demotion of the country’s rating is sweet music to some policy analysts who have decried the Government’s borrowing spree. A consultant at the Institute of Economic Affairs, Oscar Ochieng says Kenya’s Sh2.2 trillion national debt as at June 2015 means that every Kenyan bears a burden of Sh52,000. Ochieng say if we go on to pay at an average of Sh10,000 per minute (and that is assuming no further interest) it would take us 418.5 years to pay off the debt.

The current debt is going to be borne by another 16 generations! The United Nations Conference on Trade and Development (UNCTAD) Secretary General Mukhisa Kituyi, when asked about the country’s widening budget deficit and ballooning public debt said; “You are driving up your middle class consumer habits of importation of non-capital goods which are inadequately covered by exports,” he said adding that no economy can go on forever like that. “At a certain point it starts hurting you,” he stated.

Kenyans seem to be importing more consumer goods such as personal cars as opposed to capital goods such as tractors which would help in the production of more goods and services, according to Dr Kituyi.

Kenya imports mostly machinery and transportation equipment, petroleum products, motor vehicles, iron and steel, resins and plastics.

For the first three months of 2015, imports increased by three per cent to stand at Sh356 billion even as the exports shrunk by 2.3 per cent to Sh132 billion. The overall balance of payments deteriorated from a surplus of Sh8.8 billion in the first quarter of 2014 to a deficit of Sh14.3 billion in the first quarter of this year.

Dr XN Iraki, a lecturer at the University of Nairobi School of Business however cautions Kenyans not quickly to ratify the Fitch’s findings. “We need to hear from other agencies and compare. We are borrowing like all other countries, if we are paying and investing the money its ok,” he said.

Political bureaucracy

Dr Kituyi and Dr Iraki concurred that Kenya’s over-sized political bureaucracy might be depleting g public coffers – not to forget the corruption that has come with it. “Our many governments are expensive. We were told that and we said no, chickens are home,” said Iraki.

“You have developed an extremely expensive political bureaucracy which is eating into resources which should go into development investments,” noted Dr Kituyi.

UNCTAD boss noted that while the importance of devolution cannot be gainsaid “Somewhere along the line, Kenya will have to rationalise the cost of devolution.”He said the current size of Parliament and Senate is too disproportionate as a component of public tax expenditure.

In the 2015-2016 Budget, county governments were given about Sh300 billion. Another huge spending was on the SGR financed by a Sh327 billion loan borrowed from the Chinese.

The lower credit rating comes at a time when the Government intends to source for credit from the international market. Earlier this year, Kenya went for a Eurobond issue which raised about Sh200 billion.

The money was supposed to go into infrastructural development. But according to Economist David Ndii, there is not much to show for the funds. “There is no sign of an increase in infrastructure building on a $3 billion (Sh300 billion) scale, other than those projects financed by other loans such as the SGR. Where did the money go? We are squandering borrowed money,” wrote Ndii in one of the local dailies.

However, the Government debt is not always a bad thing. Unlike an individual who borrows money from a bank and has to repay it, Governments do not have to pay back.

But here’s where Kenya’s debt becomes a concern. The tax base is not increasing and as the national and county governments increase their taxes, more Kenyans will either try to avoid or evade them.