FISCAL CONSOLIDATION

No shortcuts to cutting debt – CBK governor

Says country must take immediate action.

In Summary

•The country’s total debt was at Sh7.71 trillion as of June this year.

•It has doubled in the last five years, from Sh3.62 trillion in June 2016.

CBK Governor Patrick Njoroge
CBK Governor Patrick Njoroge
Image: FILE

Kenya must take immediate action to manage its ballooning debt before it  crushes the economy, Central Bank of Kenya governor Patrick Njoroge has said.

While noting that the country has never defaulted, he was concerned that it is running out of room for further borrowing.

The concern comes at a time when Kenya continues to spend taxes on debt repayment (Sh10 out of every 100 collected), amid borrowing for recurrent and development expenditures.

The country’s debt stood at Sh7.71 trillion as at June this year, up from from Sh3.62 trillion in June 2016.

It is fast approaching the Sh9 trillion borrowing ceiling set by lawmakers in November 2019 which was reviewed from the previous Sh6 trillion.

The most recent CBK data captures external debt at Sh4.02 trillion while domestic debt is Sh3.68 trillion.

The country has recently accumulated a number of loan facilities including the fourth Eurobond issue of $1 billion (Sh108 billion) in June. 

Kenya went for the first Eurobond in 2014 worth $2 billion (Sh219.9 billion), followed by two more issues of $2.1 billion (Sh 239.9 billion) and $2 billion in 2018 and 2019, respectively.

Other recent loans include $2.34 billion (Sh257.2 billion) from the International Monetary Fund and $750 million (Sh82.5 billion) from the World Bank, in May with multilateral facilities accounting for 41 per cent of total borrowing.

Commercial loans account for 30 per cent of external loans while bilateral loans take up 30 per cent.

Locally, the National Treasury has been issuing bonds ranging from Sh40 billion and Sh60 billion every month to support infrastructure or budgetary support.

China is the biggest external lender to Kenya accounting for 67 per cent of total external debt, mainly infrastructure financing including the Sh324 billion SGR loan.

Other major lenders are (14 per cent) and France which accounts for seven per cent of foreign loans.

There have been proposals to raise the debt ceiling to Sh12 trillion to accommodate more borrowing, with the total debt currently accounting for 69 per cent of the GDP, which was captured at Sh10.75 trillion by the Economic Survey 2021, released last week.

Njoroge who appeared before the Senate Committee on Finance and Budget yesterday attributed the high indebtedness to increased fiscal deficit largely due to development expenditure driven by infrastructure projects.

There are also aspects of recurrent expenditure in areas like education, and health, increased guaranteed debt, worsening terms on new loans, such as lower concessions and increased commercial loans

He also cited “exogenous economic shocks” such as drought and Covid- 19, and an overarching concern is limited capture of the returns from expenditures (investments) through increased exports, taxes, and faster economic growth.

“Investment in infrastructure should stimulate the economy. Why is it that we cannot capture more returns on the investment in infrastructure?,” asked Njoroge.

In March 2021, the IMF assessed Kenya’s public and publicly guaranteed debt as sustainable but with high risk of distress.

“We need to be clear n the direction debt is taking us. The time is now. We don’t need to wait until it is crushing us,” Njoroge told the Kirinyaga Senator Charles Kibiru chaired committee.

The senators sought to know among others; if the country’s debt is sustainable and would not lead to default and loss of assets used as a guarantee.

To reduce the debt, the governor insisted on continued fiscal consolidation to bring the overall deficit, currently at 8.4 per cent in the wake of the pandemic, to lows of 3.9 per cent, which is targeted in the next five years.

There is also a need to explore non-debt creating financing options for public investments such as public–private partnership, the governor said, which will reduce borrowing to fund development projects, and increasing efficiency of public spending.

The country can also refinance expensive debt with debt on more favorable terms, he said, such as the first $2 billion Eurobond which is due in 2024.

“To the extent that it is possible, one can borrow cheaply in the new world to repay expensive debt,” he said.