Standard Gauge Railway train from Nairobi Heading to Mombasa.It is one of the many projects funded by Chinese debt.Photo: Madaraka Express

Kenya Overburdened by Debt

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According to the IMF World Economic Outlook database, October 2018, the percentage of public debt to GDP in Kenya from 2012 is 43.88 while 2018 is 56.101.

To be precise the country owes more than half the value of its economic output (GDP).The level of government debt has continued to increase from the early 2000. As of now, Kenya’s public debt stands at 5.3 Trillion and could go up to 6.3 Trillion in the year 2019/2020.

Public debt repayment is normally a first-charge expenditure, which means that the Treasury pays it before it can spend on anything else which means most of the money meant for development goes to repayment of debts. According to the IMF, the sustainable debt levels for the emerging market is 50% to GDP. Kenya currently stands at 56.101, indicating that we have surpassed the average target.

Public Finance Management Act

It is also important to note that the current GDP has surpassed the set mark by the Public Finance Management Act which allows the government to borrow only up to 50 percent of the GDP ratio.

With this high exposure we could be forced to pay a premium if we are to borrow money from the international markets. Research shows that African countries borrowing on the international markets routinely pay an Africa premium estimated at about 2.9 percentage points on their sovereign debt.

The National Treasury in its draft Budget Review and Outlook Paper projects that Ksh2 trillion will be added to the public debt by the time President Kenyatta completes his second term in office. This means that President Kenyatta will have presided over a debt increase of almost 300% during his ten-year tenure. By 2022, the Jubilee administration will have presided over a borrowing spree of more than Ksh7.3 trillion

Percentage of a country’s public debt to its GDP is not the only sure measure to determine whether its public debt is sustainable.  For instance, Japan, the third world largest economy has the highest public debt. Its debt to GDP ratio currently stands at 240.3% and is projected to be around 290 percent of the GDP by 2030.

Fiscal Transparency

However, given that it’s an advanced economy, it is anticipated that  its economic growth and other fiscal measures will  be sufficient in pushing down its debt levels .

Fiscal  transparency  is  seen  as  an  important  precondition  for  effective  governance,  improved economic  performance  and  prudent  fiscal  policy, it  also  functions  as  a  political  expression  of  democratic  governance  by  giving citizens and taxpayers the information they are entitled to, for purposes of holding Governments accountable. Procurement of loans should be subjected to a process where Kenyans are allowed to share their views before government borrows money on their behalf. This provision will enhance transparency and help minimize the unjustifiable appetite for debt by the government.

The  Constitution  and  the  Public Finance Management  Act  represent  a  distinctive  opportunity  to  enhance  the  role  of citizens  in  public  financial  management  processes  in  Kenya.  Chapter  twelve  on  Public  finance (Article  201)  introduces  principles  of  public  finance  among them  openness  and  accountability  including public participation in financial matters. Public finance system shall promote an equitable society, burdens and benefits of the use of resources and public borrowing shall be shared equitably between present and future generations, public money shall be used in prudent and responsible way and financial management shall be responsible and fiscal reporting shall be clear.

Public Participation

Public participation is needed before the Executive procures loans to enable Kenyans have more say in the process, since they are the ones who will shoulder the heavy burden of paying them back.

A review of the Constitution and the Public Finance Management Act shows that legislators have considerable oversight powers to scrutinize and check government borrowing to ensure it is confined within reasonable limits to avoid saddling taxpayers with unnecessary and unsustainable debt burden.

Research  has proven that  countries  with  higher  levels  of  fiscal  transparency  have  higher credit   ratings   and   lower   spreads   between   borrowing   and   lending   rates,   thus   reducing governments borrowing costs.

Another critical issue is whether Parliament is really playing its role of offering the requisite checks and balances to the Executive’s appetite for loans or is it leaving Kenyans to pay the prize of a parliament that has been reduced to a puppet of the executive.

Legislators have the powers to hold the Executive accountable with regard to loans to be procured, projects to be financed by the loans, prudent use of proceeds from loans, the ability of servicing of the loans to ensure taxpayers are protected from excessive and frivolous borrowing.

Parliament has raised a red flag over the ballooning public debt proposing an amendment to the law to regulate government borrowing to be capped at 6 Trillion. New Zealand is a good example of how the law regulates government borrowing of funds.

Their  Public  Finance  Act  is  founded  on  two  key  principles,  that  is,  increased transparency  and greater  accountability.  The  Act  requires  governments  to  be  explicit  in  their long term   fiscal   intentions   and   to   assess   them   against   principles   of   responsible   fiscal  management.

Government Expenditure

Loans can be very good with excellent fiscal policies and discipline. It could mean huge investment and development for the country .What does not seem sound is, borrowing to offset another loan.To reduce its burgeoning public debt burden, Kenya must improve its production capabilities in the long term. In the short term, measures must be put in place to reduce government spending and to enhance revenue collection.

However, the high level of public debt in Kenya narrows the window for future borrowing, and increases vulnerability to fiscal risk in the event of any urgent need for borrowing and becomes unsustainable in the long run for Kenya to have a huge public debt burden to be serviced by the taxpayer. China is our biggest lender (637B) and surprisingly most Chinese loans are conditional on Kenya’s acceptance of Chinese contractors.

This limits the loans’ developmental impact through potential technology transfers which could improve the country’s productive capabilities and in turn its future ability to comfortably absorb the debt burden. These loans retain a strong commercial flavour.Most of the Chinese’s loans require that the government of the host country will need good credit and be capable of servicing the debt ,this is an indication that the Chinese government will and can not forgive the debts as was seen in the case of Sri lanka.

The government has listed three non performing loans including Ksh 7.9 billion by State Broadcaster KBC, Tana &Athi River’s Development Authority Ksh 1.2 billion loan as well as East African Portland Cement that has a loan of Ksh 1.5 billion. These institutions will be auctioned if these loans will not be paid.

There is need to adhere to Article 206 of the Constitution of Kenya and provisions of the Public Finance Management Act, 2012 in the management of public resources and Parliament should be more vigilant, by not approving any reckless borrowing which overburdens the tax payer, otherwise we should be very afraid.

Read other related articles on The County Budget Process http://bit.do/County-Budget-Process

 

By Steve Ogolla