BE WISE

World Bank urges prudent use of loans as Kenya seeks Sh82bn

Public debt is an important tool for development, if used wisely, it says.

In Summary

•Kenya has requested for a $750 million (Sh81.75 billion)loan from the World Bank expected to hit the exchequer's accounts at the end of this month or early May.

•The country's total debt was Sh7.352 trillion as of January, according to the Central Bank of Kenya.

The National Treasury and Planning building in Nairobi.
DEBT STRESS The National Treasury and Planning building in Nairobi.
Image: FILE:

Borrowing countries must put to good use its loans, World Bank has said, in the wake of rising debt in poor and developing countries curtailed by the Covid-19 pandemic.

This comes as Kenya eyes a $750 million (Sh81.75 billion)loan from the World Bank ,expected to hit the exchequer's accounts at the end of this month or early May.


“It is important that borrowed proceeds are put to efficient use to ensure that they produce the returns necessary to repay the debts
World Bank 

It will be the third major credit facility from the global lender since the pandemic hit the country last year, having received $50 million(Sh5.4 billion) approved on April 2, 2020, and Sh $1 billion (Sh108.6 billion) on May 20, 2020.


Public debt is an important tool for development, if used wisely, World Bank has noted, saying it helps countries with low levels of domestic resources to invest in important growth-enhancing areas such as infrastructure , education , health among others.

“It is important that borrowed proceeds are put to efficient use to ensure that they produce the returns necessary to repay the debts,” Group President David Malpass said during the virtual 2021 Spring Meetings which ends today.

The lender has also called for transparency around public borrowing, saying it is critical to ensure that debt sustainability assessments are comprehensive and that official debt statistics provide an accurate picture of the situation a country finds itself in.

“Fiscal deficits have been an important driver of public debt accumulation hence prudent fiscal policy that , however, ensures that key expenditures are projected , can help reduce a country's financing needs hence drop on debt accumulation,” it says.

There have been concerns in Kenya that a huge chunk of borrowed funds are channeled towards recurrent expenditure, with little going into development.

This is propelled by the huge wage bill in government with low revenue collections leaving a huge budget deficit.

For instance in the current financial year ending June 30 (2020/21 financial year), the government will be forced to borrow slightly above 30 per cent of its Sh2.79 trillion budget.

This is about Sh840.6 billion or7.5 per cent of GDP to fund the budget deficit, with the debt expected to go even higher after the adjustment on its ceiling to Sh9 trillion and now plans to take it to Sh12 trillion.

Total debt was Sh7.352 trillion as of January, Central Bank of Kenya data shows, being Sh3.532 trillion (domestic) and Sh3.819 trillion external debt.

In the next financial year starting July 1 (2021/22),the government plans to borrow slightly above Sh1 trillion with Sh572.7 billion to be sourced locally while foreign borrowing is pegged at Sh427.5 billion.

In the budget dubbed 'Building back better days: Strategy for resilient and sustainable economic recovery',  Yatani has proposed a higher recurrent expenditure of Sh1.975 trillion (15.8 per cent of GDP) from Sh1.776 trillion.

Development spending is on the other hand expected to reduce to Sh611 billion from Sh678.5 billion in the current financial year.

Total 2021/22 budget is proposed at Sh2.968 trillion as the government works out its post-Covid-19 recovery.

To finance the high spending, Kenya Revenue Authority (KRA) is expected to collect Sh100 billion more which puts its next financial year's ordinary revenue target at Sh1.7 trillion.

This is despite the tax body struggling to hit its target in previous financial year's, with the current one proving to be an uphill task due to the pandemic.

Apart from the World Bank, Kenya has borrowed from the IMF and African Development Bank(AfDB) in the last 12 months, with the latest being the $2.34 (Sh255 billion) loan approved by IMF last Friday.

This Wednesday, National Treasury CS Ukur Yatani held talks with World Bank's executive director for  Africa,Taufila Nyamadzabo, where he pleaded with the lender to approve the $750 million loan request preferably by the end of April or early May, to enable the country to make the prompt intervention.

Kenya expects to use the loan to finance critical development expenditures in the budget for the financial year ending June 30, according to Treasury.

"Kenya looks forward to a favorable outcome once the request is placed before the Board of Directors at the World Bank in the coming few weeks,'' Yatani said. 

Yatani said the pandemic has strained government's total revenue collection, resulting in a shortfall of Sh113.2 billion as of the end of February.

According to him, the high job loss resulted in a 12.7 per cent drop in income tax. 

 The total revenue including Appropriations in Aid (A-i-A) by the end of February 2021 was Sh1.079 trillion against a target of Sh1.192 trillion, resulting in a shortfall from the target of Sh113.2 billion.

"This deviation from the target of Sh113.2 billion was explained by a deviation from the target of Sh89.3 billion in ordinary revenues and Sh24 billion in ministerial A-I-A," Yatani said.

A slowdown in business activities especially after Kenya imposed strict measures to curb the spread of the virus between March and July last year also hurt the collection of  Value Added Tax and Import Duty which dropped 8.1 and 0.4 per cent respectively. 

KRA has however in recent months said it has been surpassing its monthly collection targets for the last fur months.

Last week, the revenue agency said it collected Sh144.6 billion in March, Sh6.6 billion past its target. 

This was the highest monthly revenue performance rate since the beginning of the financial year, despite a challenging economic environment brought about by Covid-19.