ECONOMIC CRISIS

Which way Kenya, to escalate debt stock or tame the appetite?

The cash crunch in the government is being caused by decline in tax collection targets.

In Summary

• The National Treasury is planning to expand the statutory debt ceiling set at Sh9 trillion by the Public Finance Management Act, 2012.

• This being done to accommodate the fiscal deficits for the 2021-22 budget.

Graph showing Kenya's surging debt.
DEBT: Graph showing Kenya's surging debt.
Image: COURTESY

The question a typical Kenyan should ask is whether the rising debt is optimal for the country or not (Kenya being a developing country).

The Kenyan debt (public and domestic) has been on a critical steady rise. The need for burrowing has been intensified by the deficits in the budget and financing of mega infrastructural projects. The debt stock as at December 2020 stood at Sh7.2 trillion, which is estimated as 65.6 per cent of the GDP. The total external debt is Sh3.7 trillion, while the domestic debt is Sh3.4 trillion.

The National Treasury is planning to expand the statutory debt ceiling set at Sh9 trillion by the Public Finance Management Act, 2012. This being done to accommodate the fiscal deficits for the 2021-22 budget.

The country is facing a fiscal crisis and there exists need to stimulate the economy in light of the hardships brought about by the Covid 19 pandemic. Intensifying borrowing through the expansion of the statutory debt ceiling is not the optimal strategy as this is going to compromise the welfare of the household through increased costs of living. Increased debts for a developing nation like Kenya increases the sustainability risks of the debts.

The cash crunch in the government is being caused by decline in tax collection targets. The government needs to develop strategies to improve the revenue collection to avoid depending on external debt to finance the budget. Caution needs to be taken so as not to get into the brink of borrowing to finance the recurrent expenditure. Is this where the economy is headed?

The latest move by the Treasury to raise Sh23 billion through raiding the affluent parastatals confirms the economy’s cash crisis.

The strength and the ability of a country to collect more taxes is based on its ability to finance critical infrastructure such as roads and electricity, health and education. The National Treasury should lobby for increasing the maturity period of the loans taken from the potential lenders. This will help reduce the financing risks as the government will have to develop the optimal debt servicing schemes.

The state needs to explore other options of financing alternatives like diaspora bond and private placement. This will help lessen the degree of burrowing to finance the country’s fiscal deficits.