Increased debt limit to hurt Kenya's economic growth, EY warns

The country's public debt stands at Sh7.4 trillion

In Summary
  • According to the firm, while debt is good, the current numbers point at a bleak future.
  • Kenya is planning to raise its current debt limit of Sh9.1 trillion to Sh12 trillion
Treasury Cabinet Secretary Ukur Yatani poses for a photo at Parliament Buildings on June 11, 2020.
Treasury Cabinet Secretary Ukur Yatani poses for a photo at Parliament Buildings on June 11, 2020.

Kenya's plan to push towards increased debt will stifle anticipated economic growth, auditors at Ernst and Young have warned.

The is coming at the time Kenyan government is planning to increase public debt limit from current Sh9.1 trillion even as it struggle to settle current debt obligation.

According to the World Bank, in 2020 Kenya's public debt stood at 65.6 per cent of the GDP and this is expected exceed 70 per cent of the GDP in 2021.

According to them while debt is good, the current numbers point at a bleak future.

“The discourse is more robust when viewed on balance – between the debt against application of the debt as well as value-for-money of that application,” a post budget analysis shared by the audit firm says.

They added that while Kenya seems to be on the right track on matters infrastructural projects, there are reasons to be worried by the expected increase in debt portfolio.

“On visible infrastructural projects, Kenya appears to get it right and perhaps the worry is the pay-back period of the projects in order to have parity,'' the review reads in part.

According to EY, high public debt levels above 70 per cent of the GDP will put pressure on the economy and stifle growth both in the medium and the long term due to the debt repayment burden.

The audit firm warned that the policy measures may not fully achieve the expected outcomes due to the heavy cloud of Covid-19 which presents a big challenge for economic recovery.

Francis Kamau, a tax partner at the firm said that for the first time in as many years; the agriculture sector is one of the winners of the budgetary proposals thanks to a Sh60 billion allocation representing a five increase from the Sh52.8 billion allocated in the previous budget.

This is however still low compared to 10 per cent target set by Food and Agricultural Organisation (FAO).

The health sector is also key beneficiary of this year's budget having received an allocation of Sh121.1 billion while another Sh14.3 billion has been allocated towards the purchase of vaccines.

In addition, an amount of Sh1.2 billion has been allocated for the recruitment of 5,000 healthcare workers.

“While this is a positive development more should be done to contain the pandemic and hence allow people to resume some economic normalcy,” Kamau said.

However tourism appears to be a loser in this year's budget having been allocated Sh1.7 billion through the tourism fund and Sh 643 million through the Tourism Promotion Fund.

These allocations are a major decrease from the Sh9.3 billion allocated to tourism in the last financial year.

The agriculture sector allocation of the national budget increased showing the government’s intention to support the sector.

“Needless to say, a lot more needs to be done to ensure that both smallholder and large-scale farmers are taken care of in their agricultural activities such as availability of fertilizers, extension services among other needs.”

But according to Christopher Kirathe, a partner at the firm, there are fears that treasury’s well laid out plans might be affected by political shenanigans associated with a general election.

“Going by past trend, there is a real possibility of political derailment and if history repeats, we are likely to see slight derailment in the implementation of this and other equally critical projects.”

Kiraithe said that the budget allocations show a regime seeking to cement it legacy by focusing on its key flagship projects.

“Hopefully, politics will not be a risk.”

He added that political season and a dip in revenue collection thanks to Covid-19 pandemic are some of the key issues that the Kenyan economy should brace themselves for this new finance Act.

Certain recent tax initiatives such as the tax amnesty programme might contribute towards the growth in revenue collections in the next financial year,” he said.