How public debt has ballooned in UhuRuto era

The Jubilee government's appetite for expensive commercial loans over nine years has been blamed for the country's worsening debt crisis.

On Friday last week, IMF approved yet another facility worth $2.34 billion (Sh255 billion) for Kenya, sparking public uproar.

So far about 200,000 Kenyans have petitioned the IMF not to give the government any credit. 

The debt crossed the Sh7 trillion mark last year, or 65 per cent of GDP, up from Sh5.81 trillion the previous year.

It has been rising by almost Sh1 trillion annually in the last six years, having jumped to Sh5.04 trillion in 2018 from Sh4.41 trillion in June 2017. The debt was Sh3.62 trillion in June 2016, Sh2.83 trillion in June 2015 and Sh2.37 trillion in June 2014.

Economists have warned that unless the government quickly renegotiates with its financiers to reschedules some huge loans, an economic recession would be inevitable.

President Uhuru Kenyatta's Jubilee administration is accused of having opted for expensive commercial loans since assuming office in 2013, plunging the country into its worst debt quagmire.

The poor strategy by Treasury mandarins saw the government borrow heavily from the international market, accumulating loans with a short repayment period.

Some of the money borrowed expeditiously went into building new roads, a modern railway, bridges and electricity plants, driving up borrowing to plug the budget deficit.

Pressure for repayment of the loans forced the government to commit more than half of its annual revenue to pay the loans.

Over time, little cash was left for strategic sectors of the economy that would be able to generate resources to drive growth.

Kenya is faced with ballooning revenue shortfalls caused by the Covid-19 pandemic that has  disrupted  the economy.

The Treasury, therefore, will accelerate borrowing over 14 months.

On Tuesday, ANC leader Musalia Mudavadi told the Star the Jubilee government messed up the economy by going for commercial loans in search of quick cash.

The former finance minister said the country must ensure a proper borrowing portfolio with a blend of commercial and concessional loans.

“There must be a mix, if you don't get it right, you will be in trouble. It is important to what goes where,” Musalia said.

“The concern we have is that the growth of commercial loans was so rapid within a short time. We have had cases in which some of these resources were misappropriated as in the case of the dams scandal."

To get out of the desperate situation, Musalia said the government must urgently ensure a structured renegotiation of the loans with financiers to save the economy.

“The government has limited options at the moment. It must stabilise first before doing anything. It must reschedule and renegotiate to suspend some payments,” he said.

The former Finance minister said resources saved from the loan repayment suspension will be pumped into the economy and the private sector to generate business.

Analysts said growth in public debt has partly been driven by over-budgeting, leading to ambitious tax targets, which have largely been missed.

When President Kenyatta assumed office in March 2013, the public debt stood at a mere Sh1.7 trillion which shot up to Sh1.8 trillion by June the same year.

However, the Jubilee administration, which started its ninth year in office last March, will push the country's public debt to Sh7.8 trillion by June, in two months

According to the 2021-22 Budget Policy Statement, Uhuru's administration will in the next financial year break the Sh9 trillion budget ceiling set by Parliament, worsening the debt burden on Kenyans.

The government is projected to borrow a further Sh930 billion, taking the  total debt burden to Sh1.02 trillion by June next year, two months before Uhuru's term expires.

This means Uhuru will have borrowed slightly more than Sh6.5 trillion to finance his manifesto over 10 years since he took over power from  Mwai Kibaki.

The deficit in the next financial year will be plugged by Sh267.3 billion from external financing and Sh662.8 billion through domestic borrowing.

The Treasury is already pushing to raise the debt ceiling to Sh12 trillion by next year to accommodate the anticipated borrowing to fund the 2021-22 budget.

The total public debt was tracked at Sh7.35 trillion in January, according to the Central Bank of Kenya. The external debt is currently Sh3.8 trillion while domestic debt is Sh3.5 trillion. 

In the latest loans, the government has acquired Sh257 billion from the International Monetary Fund, reportedly to bridge the gap in fighting the Covid-19 pandemic.

This brings the total borrowed to fight the pandemic since March 2020 to about Sh1.2 trillion.

Before the IMF loan landed, between March and November 2020, the country borrowed Sh971 billion to fight Covid-19.

This means that country borrowed about Sh121 billion every month in the eight-month period.

Kenya received the first Covid-19 loan of $50 million from the World Bank in April, barely two weeks after the country reported its first case in mid-March. This was followed by $1billion (Sh106 billion) to support its budget and cushion the economy from the impact of the pandemic.

According to World Bank county director for Keny Felipe Jaramillo, the $1 billion financings comprised a $750 million credit from the International Development Association and a further $250 million loan from the International Bank for Reconstruction and Development (IBRD).

The loan was priced at 1.35 to two per cent, with a five-year grace period. The repayment period is 30 years.

A week earlier, the East African nation had received a Rapid Credit Facility worth $739 million (Sh79 billion) from the IMF to help it cover the balance of payments shortfalls this year. It was also hoped it would  cushion the weak shilling that currently trades above 106 units against the greenback.

The RCF provides low-access, rapid, and concessional financial assistance to low-income countries facing an urgent balance of payments need, without ex-post conditionality.

It can provide support in a wide variety of circumstances, including shocks, natural disasters, and emergencies resulting from fragility. The RCF also provides policy support and may help catalyse foreign aid.

Financial assistance under the RCF is provided as an outright loan disbursement. While RCF financing takes the form of a one-off disbursement, there is scope for repeat use.

Repeat use of the RCF is possible if the balance of payments needs is caused primarily by a sudden and exogenous shock or the country has established a track record of adequate macroeconomic policies.

However, no more than two disbursements may be made in any 12-month period.  

In the same month, Kenya received €188 million (Sh22 billion) from the African Development Bank to support the government’s efforts to respond to the pandemic and mitigate related economic, health and social impacts.

Debt servicing costs for the first eight months through February 2021 surpassed recurrent expenditures such as salaries, allowances and government administrative expenses for the first time.

This would signal the gravity of the country’s worsening fiscal position.

Total debt repayments in the period amounted to Sh638.29 billion, surpassing expenditure on the day-to-day running of the government by Sh5.71 billion.

Kitutu Chache South MP Richard Onyonka, an economist and member of the National Assembly's Budget and Appropriations Committee, faulted the government for its appetite for commercial loans.

“We need a clear audit of all the debts we have and we should renegotiate them into concessional loans so they are paid over a longer period of time,” Onyonka said.

The vocal MP also suggested the government freeze new development projects and instead concentrate on programmes with high economic impact.

“Let us expand the tax bracket and stop punishing Kenyans with new taxes,” he said, adding Kenya cannot afford to do away with the IMF facility to avert disastrous consequences.

In 2019, Kenya borrowed expensive commercial loans such as the Sh25 billion syndicated loans with the Eastern and Southern African Trade Development Bank.

The loans were at a cost of the six-month London Inter-Bank Offered Rate (Libor) plus a margin of seven per cent.

The six-month Libor was about 2.8 per cent at the time, indicating a total repayment cost of nearly 10 per cent.

Another recent expensive debt is the Sh125 billion loan signed in February 2019 at a cost of the six-month Libor plus s 6.95 per cent margin.

On Friday last week, IMF approved yet another facility worth $2.34 billion (Sh255 billion) for Kenya, sparking public uproar.

The financing is under the Extended Credit Facility and the Extended Fund Facility.

An initial disbursement of Sh79 billion is expected, of which Sh34 billion will be released immediately and Sh44.2 billion by June 30.

Assistance under an ECF arrangement is provided for an initial duration from three to five years, with an overall maximum duration of five years. Following the expiration, cancellation, or termination of an ECF arrangement, additional ECF arrangements may be approved. 

(Edited by V. Graham)