• Empirical research has proven that the most ideal and sustainable debt to GDP ratio is between 28-35 per cent.
• Our National Treasury has for the longest time raised this to 50 per cent and tinkered with figures to justify any increase.
Kenyans are asking why we have sunk so deep in debt in a decade, yet only about seven or so years ago Kenya was on an economic takeoff. There are many factors to this and it’s important to link all of them for us to understand the full spectrum of our predicament.
Kenya recently raised its debt ceiling from Sh5 trillion to Sh9 trillion after surpassing the earlier ceiling by a trillion. When the matter was brought up in Parliament, yours truly was amongst those who opposed it, often being told off for waxing eloquence that couldn’t change anything. I am glad that this has been vindicated not so long after.
Empirical research has proven that the most ideal and sustainable debt to GDP ratio is between 28-35 per cent. Our National Treasury has for the longest time raised this to 50 per cent and tinkered with figures to justify any increase. This was also aided by the fact that our economy was rebased in 2015 to indicate that we were 25 per cent richer, leading to more debt appetite due to the availability of cheap loans from non-performing western economies. This was after the 2008 global financial meltdown.
Consequently, Kenya’s GDP was revised upwards from Sh7 trillion to Sh9.8 trillion. The recent increase of the debt ceiling means our debt to GDP ratio will now stand at 92 per cent, if Treasury were to exhaust this fiscal window/space, going by past behaviour.
The question that lingers is how did we get here in the first place? The current budget of 2019-20 is a whopping Sh3 trillion compared to our annual target revenue of Sh1.7 trillion. This is to mean in nominal terms, we have a Sh1.3 trillion budget deficit that must be financed by domestic and external borrowing.
To breach this gap, Treasury this week ordered state agencies to surrender 90 per cent of their reserves and appropriations in aid. This directive is essentially to manage short-term cash flow challenges as KRA has fallen below targets by over Sh123 billion and to hold on before the next borrowing is okayed, as well as to retire expensive commercial loans.
However, these shortfalls that become deficits are usually rolled over to the next financial year instead of budget cuts by way of supplementary budgets.
The biggest problem in our budgeting is the poor costing of govt projects by ministries, departments and agencies, which are always in a hurry to spend more each financial year. This doesn’t encourage financial probity, especially due to the fact that procurement plans aren’t very well thought out. There is also a disconnect between budgets, procurement plans, performance targets, and employee appraisals.
In addition, the political class is keen on overpromising the public projects such as roads, hospitals, water, electricity, and other freebies, which come at inflated costs to create room for thievery and kickbacks to finance social status. This is due to the big man syndrome and the need to satisfy the appetite for handouts by the public, who live from hand to mouth, in exchange for political mileage that comes with political philanthropy.
These two factors that fuel development corruption are to blame for the situation we find ourselves in, coupled with the international merchants looking for growth of their capital, even if it means enslaving fledgling economies and masses of people into poverty. We have been here before in the 90s with the Paris Club of debtors being forced to waive what was then known as odious debt.
Moving forward, it’s important for us to live within our means, doing away with grandiose projects that have limited return on investment to the country. Second, projects need to be properly cost with regards to full value for investment rather than the mere ability to repay the debt, by gauging the level of growth to the economy in real terms rather than cursory or inferred projections with no actuarial basis.
Third, it’s only fair for Kenya to apply to be reclassified as an LDC rather than LMC. China, despite being the second-biggest economy is not yet classified as HDC.
Fourthly, political promises and elections campaign financing are elements that need to be put under the full ambit of the law for effective regulation. Fifth, we need to go back to the Medium Term Expenditure Framework that is properly linked to the Medium Term Plans of Vision 2030, starting with the current one on the Big Four agenda. Sixth, its time to establish the loans and grants council to help regulate debt for both national and county governments. Seven, we need to re-establish the National Economic and Social Council to help us manage our macro and microeconomics in order to see the ‘big picture’.
It appears that the economic thought has been left to a few people at the national treasury, whose contracts are not only shaky and recruitment wanting, but also are overstretched, moving from one meeting to another, while at the same time engaging in transactional negotiations with spending entities in govt.
Finally, we need a serious rethink of the pathos and ethos of our public service. After all, it’s the little things that matter. If we focused on efficient and effective public service delivery coupled with the manufacturing of the most basic and commonly used products within our economy and the Eastern and African region, we will go far as a country.
Our economy needs new arrears of growth and we have them in abundance.