Debt payments surpass State running expenses
Tuesday April 25 2023
Debt repayments for the first nine months of the current financial year overtook the national government’s recurrent spending on items like civil servant salaries for the first time, underlining the burden of mounting State borrowing.
Kenya spent Sh815.35 billion on debt repayments between July 2022 and March, up from Sh740.69 billion in the same period a year earlier.
This marks the first time in Kenya’s history that debt costs have surpassed the recurrent expenditure that stood at Sh814.7 over the period, Treasury data show.
Read: Pain of Sh67bn shortfall amidst debt repayments
Kenya ramped up borrowing under former President Uhuru Kenyatta’s administration to build infrastructure, leading to a squeeze on its finances as the loans fall due amid criticism over the resulting debt burden.
The Treasury data show debt repayments have nearly tripled in six years, having surged from Sh273.64 billion in the nine months that ended March 2016.
This has left President William Ruto’s administration with a narrow fiscal space to roll out his policies, preventing it from making deeper cuts in the country’s borrowing.
Treasury data show that the new administration tapped loans worth Sh452 billion in the six months to March, which is more than the Sh434.6 billion that its predecessor borrowed in the same period a year earlier.
Analysts had expected that the Ruto administration would cut fresh borrowing by a larger margin after committing to ramping up its tax collections.
But the rise in spending under the Bottom-Up economic plan, which proposes to channel resources to sectors that can have a massive impact in creating jobs and wealth, has upended the plan to go slow on debt.
The debt servicing costs have been climbing in recent years after the grace period extended by rich countries, particularly China, expired, with repayments for domestic debt fast falling due.
At Sh815.35 billion, debt repayments have gobbled an equivalent of 58.52 percent of Sh1.39 trillion taxes collected in the nine months to March 2023, leaving little cash for building roads, affordable housing and revamping of the ailing health sector—which are key for job creation and improved living standards.
Kenya’s debt increased more than four-fold to Sh8.66 trillion under Dr Ruto’s predecessor, who invested heavily in new rail links and other infrastructure.
The surge in liabilities left the country at high risk of debt distress, according to the International Monetary Fund. Kenya has insisted it cannot default on its debt repayment obligations.
“We are not insolvent. We can finance repayments. It is a significant sacrifice but we are actually able to pay,” David Ndii, President Ruto’s chief economic adviser, said recently.
He said default was a “very bad idea” since it would force the government to “spend the next three to four years in very protracted debt restructuring negotiations.”
The increase in debt uptake came in a review period that saw the State cut both recurrent and development spending.
Recurrent spending dropped by Sh4 billion to Sh542.6 billion when the Ruto and Kenyatta presidencies are compared while development expenditure fell by Sh32.7 billion to Sh106.7 billion.
Recurrent expenditure normally includes civil servant salaries, domestic and foreign travel costs, and fuel costs for the government’s fleet of vehicles.
Analysts at Parliamentary Budget Office (PBO) – a unit that advises lawmakers on financial and budgetary matters – say public borrowing in the coming years will be driven more by the need to repay maturing debts than fund infrastructure development.
The government largely borrows funds locally and abroad to bridge the deficit in annual budgets.
The growing debt burden reflects fast-maturing commercial and semi-concessional loans which the Jubilee administration contracted in its early years in office to build a modern railway, new road highways, bridges and electricity plants.
“Whilst initially the fiscal deficit was prompted by large infrastructure-related expenditures, the increase in debt servicing expenditures alongside critical expenditures (such as the implementation of the economic recovery strategy, national election-related expenditures) is expected to play a greater role in the stickiness of the fiscal deficit over the medium term, and determine the pace of debt stock growth,” PBO wrote in an analysis on debt management strategy.
The Treasury in March lowered the budget for debt repayments for this fiscal year to Sh1.36 trillion from an earlier estimate of Sh1.39 trillion.
Read: Treasury saves Sh32bn on lower debt repayment
“The debt service has been revised downwards due to lower than the projected budget deficit,” director-general for Public Debt Management Office at the Treasury Haron Sirima told the Business Daily via text last month.
“There is also the continued substitution of domestic borrowing (short-term) with (long-term) external concessional borrowing. Note that domestic debt service through T-bills mature within a fiscal year, while concessional loans mature over 15 years and beyond.”
Large external repayments which had been budgeted at the beginning of the financial year included Sh103.75 billion to China’s Exim Bank which funded the standard gauge railway, among other projects, and Sh61.88 billion to a syndicated loan arranged by Comesa-owned Trade and Development Bank.
Others are interest payouts for the Eurobonds (Sh53.57 billion), World Bank Group’s International Development Association (Sh49.19 billion), Italy (Sh19.73 billion), France (Sh17.98 billion) and Japan (Sh12.42 billion).