DEVELOPMENT

Kenya's loan appetite grows as grants drop

If Kenya continues to get more loans than grants, the sectors which depend on the latter will get less resources

In Summary
  • According to an analysis of aid flows to Kenya, the trend is happening as Kenya's debt continues to rise to levels that threaten servicing sustainability.
  • The main difference between a grant and a loan is repayment. A loan requires you to repay the money you borrow, whereas a grant does not.

Kenyans have embraced taking loans through digital-lending apps.
Kenyans have embraced taking loans through digital-lending apps.
Image: FREDRICK ONYANGO

Kenya's loan appetite from international financial institutions(IFIs) grew even as grants fell seeing sectors in health and humanitarian aid suffer lower budgets.

An analysis of aid flows to Kenya before and during Covid-19 says the trend is pushing the country's debt to levels that threaten servicing sustainability.

“While borrowing continues in the short term to compliment domestic resources available for budgeting, increasing borrowing will mean that Kenya has to contend with increasing debt service payments, which, may limit the amount of resources available for budgeting,” says the analysis by the Development Initiatives.

Development Initiatives (DI) is a global organisation harnessing the power of data and evidence to end poverty, reduce inequality and increase resilience.

A loan requires you to repay the amount borrowed, whereas a grant not repayable.

Grants may be awarded by government departments, trusts, or corporations and given to individuals, businesses, educational institutions, or non-profits while loans are given by financial institutions.

In this scenario, if Kenya continues to get more loans than grants, sectors like health, agriculture and education that rely on the latter will get less resources as the country services its debt.

While there was been a significant year-on-year increase in total revenue (except in FY2020/21), the reverse was true for grants.

Grants decreased annually between FY2016/17 and FY2019/20 before increasing in FY2020/21.

An analysis of the FY2020/21 shows that revenue collected was Sh1.892trillion, grants received stood at Sh57billion while the budget deficit was Sh840.6billion.

The revenue collected had to first offset the budget deficit before being allocated to the various sectors that ended up with smaller amounts. 

Most sectors in Kenya's economy are reliant on donor financing or grants to contribute to sector programmes, according to the Development Initiative.

Donor financing compliments domestic revenue available for sectoral budgeting in almost all the sectors in Kenya.

While five of the 15 bilateral donors that regularly contribute to Kenya increased their contributions between 2018 and 2019, only three donors increased their contributions between 2019 and 2020; European Commission (23.4 per cent), Denmark (15.5 per cent) and Sweden (8.0 per cent).

The health sector had the biggest share of allocation contributed by bilateral donors in the three years reviewed.

However, allocations fell by 31.1 per cent between 2019 and 2020, despite health being the primary sector for use of the grants.

“While IFIs prioritised allocation to the governance and security, agriculture and food security and education sectors in 2020, bilateral donors prioritised health throughout the period reviewed. IFIs’ allocation to these sectors increased consistently between 2018 and 2020, except in the education sector in 2019, which dropped by 45.6 per cent,”reads the analysis.

It notes that while disbursements from IFIs grew substantially between 2018 and 2020, growth of bilateral and multilateral aid was inconsistent in the same period.

The IFIs disbursed $671 million in 2018, this grew to $1.235billion in 2019 then $1.432billion in 2020.

Bilateral donors disbursed $971million in 2018, this went up slightly to $989million in 2019, before dropping to $794million in 2020.

Multilateral donors disbursed $349million in 2018, this dropped $323million in 2019 then improved to $345milion in 2020.

In the three years IFIs prioritised allocation to the governance and security and agriculture and food security sectors, while bilateral and multilateral institutions prioritised the health and humanitarian sectors.

“With the country battling with reduced revenue collection, exposing it to another financial year of ballooning debt and budget deficits the country needs to figure out how to get development funds,” said Mohamed Salat, Economist at the Institute of Public finance.