“We don’t have a trillion-dollar debt because we haven’t taxed enough; we have a trillion-dollar debt because we spend too much.”
In uttering these words, Ronald Reagan, the 40th president of the United States, did not have Kenya in mind. In fact, he died before stepping foot in the country. He only hosted former President Daniel Moi at the Oval Office in September 1981.
Fast-forward to 2018, Kenya, which had a public debt of Sh749.3 billion by the time Reagan succumbed to Alzheimer’s disease in June 2004, is now swimming in Sh5 trillion debt and counting. Each Kenyan now owes Sh104,000 in national debt.
The negative effects of Kenya’s borrowing binge are now being felt by a tycoon at Karen Country Club and a peasant farmer in Munugi village, Vihiga County. If it is not via increased cash transaction fees, it is through high kerosene prices.
Rosemary Awour, a Mathare resident working in a hotel where she earns Sh9,500 a month, resigned on Saturday after receiving her September salary. She is planning to relocate to her village in Migori county.
“Suicide thoughts have replaced the joy that came with paydays. After paying bills and debts, I will remain with debts, not even a shilling to buy a sweet for my lastborn daughter,” Awour said.
With nostalgia written all over her ageing face, though she is barely 40 years old, Awour recalls how Sh1,000 was a big deal two decades ago.
“That was enough for my mother to pay rent for our room in Kibra and still have some money to buy rice and flour. Today, the amount cannot buy enough kerosene to last a month. I better go back to Migori, where I can use firewood and cow-dung to cook,’’ Awour said.
Central Organisation of Trade Union secretary general Francis Atwoli decried the new taxes, saying they will hurt all Kenyans regardless of social class.
“Application of VAT on petroleum products will discourage people from travelling, while the cost of medication and housing will be equally expensive. This is because everything we do is dependent on the cost of fuel,” Atwoli said.
AMBITIOUS BUDGET
On September 21, President Uhuru Kenyatta signed into law Finance Bill, 2018. Among other things, it introduced eight per cent Value Added Tax on petroleum products, 1.5 per cent levy for the National Housing Development Fund and kerosene adulteration tax.
He also imposed Sh20 per kilogramme of sugar confectionery, including white chocolate, increased excise tax on cash transfer from 12 per cent to 20 per cent, and that of calls and data from 10 to 15 per cent.
Uhuru intends to ride on new taxes to fill the Sh67.5 billion hole in this year’s budget. The funds will also finance his Big Four agenda of affordable housing, universal health care, manufacturing and food security.
“I have signed into law the Finance Bill 2018. I give my commitment that I will ensure proper utilisation of public resources for a better Kenya. I will not relent in the war on corruption,” Uhuru tweeted after assenting to the controversial bill.
A day before, the National Treasury was forced to slash the expenditure budget for 2018-19 by a whopping Sh55 billion via a supplementary budget. This was barely three months after announcing an ambitious budget of Sh3.07 trillion, premised on Uhuru’s Big Four legacy plan.
This despite the country expecting to collect Sh1.6 trillion domestically. Some Sh870.52 billion or 51.56 per cent of it is to go towards repaying debt, against the internationally accepted threshold of less than 30 per cent.
OVERTAXATION PARADOX
Kenya has set aside a recurrent expenditure budget of Sh1.55 trillion and plans to spend Sh642.8 billion on development. Treasury is staring at a budget deficit of Sh558 billion to be financed by net external loans of Sh287 and domestic borrowing of Sh271.9 billion.
According to development economist Anzetse Were, Kenya is living large on debt going against both basic common sense and fiscal prudence.
She explains that while the public increases the level of aggregate demand in an economy and can compensate for failings in other components of aggregate demand, such as a fall in household and private sector spending, borrowing to satisfy this need is disastrous.
According to the Institute of Economic Affairs, Kenya’s spending has grown at an average of 14.7 per cent, yet revenue growth has only increased by 12.7 per cent.
Government spend has grown by up to 90 per cent during Uhuru’s administration, from Sh1.6 trillion in 2013-14 to Sh3.07 trillion in the current financial year. This is expected to grow further in 2019-20 to Sh3.4 trillion and Sh3.8 trillion at the end of his term in 2022.
Even so, the Kenya Revenue Authority has been lagging behind in revenue collection, consistently missing targets for three consecutive financial years.
In 2015-16, it collected Sh1.210 trillion against the target of Sh1.217 trillion. The government collected Sh1.40 trillion the following year, missing set target by Sh54.8 billion. Last year, the taxman missed revenue target by Sh172.4 billion, due to shortfalls in income tax and appropriation in aid (A-I-A) collection.
Financial analyst AlyKhan Satchu, like Ronald Reagan, thinks that overtaxation is not a solution to budget deficit. Rather, it creates more economic problems, like high inflation and worsening ease of doing business.
He told a local daily that the government can only ease pressure on fiscal plans by applying stringent controls on expenditure.
“The overriding policy initiative is to control. That is the disease; everything else is a symptom of that disease. The state has squeezed existing taxpayers until the pips have squeaked,” Satchu said.
His views are supported by PKF consulting economist Michael Mburugu, who likens additional tax demands to milking a heavily pregnant cow.
DEBT BINGE
High budgetary needs but low revenue collection has seen Uhuru’s government turn to debt financing, accumulating Sh3.14 trillion in debt since he came to power.
According to the Draft 2018 Budget Review and Outlook Paper issued by Treasury on September 19, Treasury intends to borrow up to Sh2.13 trillion in the next five years to fill budget deficits, sealing Uhuru’s debt at just above Sh7 trillion by 2022.
Kenya’s total public debt stood at Sh5.04 trillion in June 2018, up from Sh4.41 trillion in June 2017, Sh3.62 trillion in June 2016, Sh2.83 trillion in June 2015, Sh2.37 trillion in June 2014 and Sh1.89 trillion in June 2013.
This is much higher compared to its regional neighbours. Tanzania’s public debt is currently at $25 billion (Sh2.5 trillion), while Uganda and Rwanda have total debt of $15.1 billion (Sh1.51 trillion) and $4.01 billion (Sh400 billion) respectively.
According to the 2018-19 budget, the debt service for the year is expected to reach Sh870.6 billion. This includes the expected repayment of Sh194 billion principal payments for the tap-sale component of the 2014 sovereign bond and two syndicated bonds.
Debt to gross domestic ratio is on an upwards scale in Kenya. In 2012, the country’s debt to GDP ratio was 38.2 per cent and rose by 100 basis points to reach 39.2 per cent in 2013. In 2014, debt to GDP touched 44.2 per cent, before settling at 48.8 per cent in 2015.
In 2016, debt to GDP was at 53.8 per cent before hitting an all-time high of 57.1 per cent last year. Kenya’s debt to GDP is currently at 56.2 per cent.
Even so, Treasury insists that Kenya continues to face a low risk of debt distress, as it remains below the threshold of 74 per cent of GDP in net present terms.
It is targeting debt to GDP of 48.6 per cent by June 2019 and projected to decline to 43.2 per cent of GDP by 2021.
This debt performance is attributed to the high level of concessionality of current external debt and a positive outlook in macroeconomic indicators.
Even so, the threshold is among the least in East Africa, compared to Uganda and Tanzania, who have debt to GDP ratios of 38.2 per cent, while Rwanda’s currently is at 47.2 per cent. Burundi’s debt vulnerability is highest at 57 per cent to GDP.
On Friday, the Kenya National Bureau announced that September inflation rose 5.7 per cent from 4.04 in August, indicating tougher times ahead as effects of value added tax on petroleum come into play.
The cost of living is expected to rise even higher in the coming months as the spiral effect of high fuel prices extends to other sectors of the economy.
Economist David Ndii, while speaking at the Ukweli Party forum in Mathare on Saturday, asked Kenyans to brace for even tougher times ahead.
‘’Fungeni kamba (tighten your belts) for higher cost of living. These are results of a greedy government that borrows and budgets way beyond its means,’’ Ndii said.
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