President William Ruto’s administration, in its spending plan for the next financial year, says it would implement budget cuts “to slow the yearly increase in the public debt”.
Treasury says an efficient liability management strategy is in the works, and would be implemented “without affecting the provision of services to the public”.
But experts hold that despite the desire to deal with the question expeditiously, those concerned have to appreciate that there is no quick fix.
“We are dealing with 10 or thereabout years of debt that has accumulated over time,” Dr Abraham Rugo, of the International Budget Partnership – Kenya, told the Star.
Dr Rugo holds the main challenge with the debt is that it has shocks from both inside and outside the borders.
“The debt problem has been largely driven internally by very high interest rates and externally by forex fluctuations. But the more the Kenya shilling appreciates, the more the forex shocks are manageable,” he added.
Dr Rugo emphasised that despite the reprieve in a stronger shilling, the interest on domestically borrowed loans, which are now at almost 18 per cent, remains a problem.
For the budget expert, there is a peak of payment that still has to be made; hence, Kenyans are still not out of the woods yet.
This year, the government went to the market, and cleared the entirety of the principal for Eurobond and a bit of SGR.
This saw the shilling gain against the US Dollar, easing the external debt stock by a significant amount, about Sh1 trillion according to the CBK.
Dr Rugo says even so, the crisis will not be resolved quickly, especially given the situation where the country was spending about Sh73 out of every Sh100 revenue.
“When debt alone is taking about 73 per cent, it means you still have to figure out the problem. All other services that you are supposed to offer cannot be provided with Sh27,” he explained.
Controller of Budget Margaret Nyakang'o recently told MPs fiscal consolidation was the only way out.
"The CoB recommends the need to reduce deficit budget financing through fiscal consolidation to curb further growth in public debt," she said.
But the argument is that the government still needs to provide public services, a situation complicated further by an ever-growing population.
Dr Rugo said with the numbers increasing, it means more children in schools who need more classes, making further borrowing inevitable.
He observed the crisis is not over yet but as long as we can manage the expenditure level, and interest rate for local borrowing, the situation will be manageable.
The pressure to survive is yet another challenge and is cited for instances of borrowing to finance recurrent expenditure.
On this, the IBP-Kenya boss said much as the move was against the public finance law and practice, survival is crucial to the government.
To mitigate this, the government wants ministries, departments, and agencies to survive on their own devices.
“They need to not only mobilise more non-tax revenues but also transfer resources to the exchequer,” Treasury CS Njuguna Ndung’u said.
“Eventually, the majority of the MDAs are expected to be self-financing,” the CS added, saying the measures are aimed at stabilising the growth of public debt.
The Parliamentary Budget Office, the body that advises MPs on the economy, says a surplus (of revenue) is necessary to achieve the legal threshold of 55 per cent of the GDP.
“The National Treasury requires a progressive primary surplus that eventually leads to the debt anchor,” experts said in options for next year’s budget.
“Based on macroeconomic modelling, the scenario assumes a target of 1.6 per cent primary surplus as the first step in the journey to achieve the debt anchor by 2028,” PBO said.
It advised, “To achieve the desired primary surplus, the fiscal deficit should not exceed four per cent of GDP, Sh721.8 billion in the financial year 2024-2025.”
For Dr Rugo, said the fastest way for fiscal consolidation is “completely doing away with non-performing state-owned enterprises.”
“The SOEs continue to be kept afloat yet they don’t deliver anything. We can merge some and reports are there to guide us. SOEs in their collectivity spend about 28 per cent of our budget yet some perform national or county government functions,” he said.
“We need to deal with the state corporations and have the government borrowing less domestically so banks have no other role to play but to facilitate economic activities which they are not doing now.”
The National Assembly Budget Committee also backed the fiscal consolidation path noting that expenditures on interest payments on public debt had increased from 2.4 per cent to 4.8 per cent of GDP.
President Ruto recently announced that his administration would cut Sh500 billion from this year’s budget.
Experts say if the directive is taken up seriously, it will be possible to deal with the debt question, starting with the outer years.
The unpopular view, Dr Rugo stated, is that “the government needs to borrow less domestically, and reduce interest rates so that there is more money available to the private sector.”
The central argument is that the private sector is the one that employs people and is the one that facilitates circulation of cash in the economy.
“When all the money is being gobbled up by the government, then you have very little money running in the economy,” he said.
“Pending bills are owed to private actors …and they are the ones who create employment. When they are stifled of cash over non-payment and cannot access credit from the banks, then it becomes a challenge.”
Despite all this, Dr Rugo concludes, “It is not a broken telephone.”
