Experts agree that the rise in debt has been too fast but none of them
clearly states how far this is risking the economy. PHOTO | FILE
When Kenya’s debt ratio stood at 26 per cent of economic growth
in 2012 (an election year), economists felt the words ‘robust’ and
‘stable’ were befitting.
Commentators would soon
swallow their soothing sentiments when ambitious infrastructure plans
blew government expenditures beyond the ceiling and Kenya went on a
borrowing spree almost doubling the debt to GDP ratio in under four
years.
At the current Sh3 trillion debt level, which is
playing above the 50 per cent ratio to the Gross Domestic Product
(GDP), the country’s debt burden either presents a risk to the future
development, is healthy and below limit or is balancing in between,
depending on who you talk to.
Experts agree that the rise in debt has been too fast but none of them clearly states how far this is risking the economy.
Is
Kenya walking a tight rope and gambling the future of its citizens in
the heavy debt commitments? What are the assumptions about the country’s
rosy economic outlooks?
Smart Company reached out to
Treasury Cabinet Secretary Henry Rotich who is basically at the helm of
steering economic matters. It is under his watch that the debt has grown
to astronomical level.
Mr Rotich nonetheless paints a
bullish outlook, maintaining that the country is far from debt distress
owing to the economic growth and the expected benefits from the
investments the debts go into.
“While the quantum of
debt is important, its composition (mainly concessional — meaning it has
a low interest rate and very long repayment terms regime) and its
application— that is, it is incurred mainly to fund infrastructure gives
it very good prospects of boosting economic growth in the medium to
long term.
By Country Policy and Institutional
Assessment (CPIA) index standards, Kenya’s debt level should be a
concern only when it surpasses 74 per cent of GDP,” Mr Rotich (right)
wrote back in response to inquiries.
CPIA index
assesses the conduciveness of a country’s policy and institutional
framework to poverty reduction, sustainable growth, and the effective
use of development assistance.
The 74 per cent mark
implies that Kenya could borrow Sh4.4 trillion at the current GDP level.
Mr Rotich believes Kenya can pile up more debt without breaking its
back.
Every Kenyan already has at least Sh80,000 debt on their head as the country begs for more.
Experts
who faulted the rate quoted by the CS were also amazed at his move to
compare Kenya’s debt to GDP ratio with advanced economies such as Japan,
France, the United Kingdom, Spain, Italy and the USA.
Nairobi-based
analyst Aly-Khan Satchu agrees that Kenya is yet to cross the red in
borrowing but faults both the transparency on the real debt levels and
the comparison with the developed world.
“The challenge
is that there is some opacity in total debt but for now, it is within
bounds. I politely beg to differ with the 74 per cent debt-to-GDP ratio
as this would put enormous pressure on the shilling and bond yields
creating a negative feedback loop. What is clear is that we cannot move
the dial on all our projects simultaneously. ‘Sequencing’ is key in
order to manage the stress spikes,” Mr Satchu told Smart Company.
The analyst counselled progressive borrowing that allows the economy to adjust before another huge loan is taken.
Kenya
has, however, been on the fast lane of debt for a while. Between the
2013/2014 and the 2014/2015 financial years alone, debt shot up by Sh423
billion representing a daily average climb of Sh1.18 billion. The
country was borrowing Sh817 million per second!
The
Kenya Institute for Public Policy Research and Analysis (Kippra) acting
executive director, Dr Dickson Khainga, said while the current debt
levels are sustainable, the country has reached its limits.
“I think we are still relatively safe but because we have certain macro-economic assumptions in the medium term.
The
big question is how we can maintain that focus and achieve it. The Sh3
trillion debt should be scary enough and Kenya should not go beyond this
in my opinion,” Dr Khainga said.
“We face a huge risk
in the event that the global economic circumstances slightly differ
with our outlook, then we will have a problem.”
Mr
Rotich believes the country’s diversified economy and the investment in
the infrastructure are shields enough to avert any possible adverse
effect the debts could have on future development agenda.
This
is despite the World Bank’s worry in March that Kenya’s repayment
burden was increasing with steady growth of Chinese loans.
“Debt
in nominal terms might appear to be rising but remember the economy is
also growing and therefore, as a ratio to GDP, Kenya’s debt is still
low. Our current debt burden does not hurt our future development
agenda, if anything it helps it because it has been strategically
deployed on heavy investment in economic assets such as roads, railways
and energy projects all of which are the bedrock of strong economic
growth,” Mr Rotich said.
Among the key projects Mr
Rotich believes will be bear economic fruits include the standard gauge
railway believed to lower the cost of doing business by providing a more
efficient transport alternative for moving mass cargo.
Critics
of this approach fault the missed opportunity in the construction of
the multi-billion shilling rail project with close to 75 per cent of raw
materials procured from outside Kenya, denying local businesses a share
of the cash.
The Chinese will also run the railway
for at least five years and Kenya’s struggling manufacturing sector
risks sinking under cheap Chinese imports when the railway starts
operations.
The SGR is widely seen as more of an import
than export tool as Kenya’s main exports are fresh produce, which are
ferried by air.
The strain on the repayment of debt was
hinted at in the current financial year where Sh466 billion was
proposed for use in servicing it, casting doubt on a lower inflation.
With a fifth of the budget already locked in debt repayments and the
growing recurrent expenditures in an election year, it is hard to rule
out possible draining of development cash.
According to
a report released by Controller of Budget Agnes Odhiambo reviewing the
national government’s implementation of the 2014/2015 budget, the amount
of money paid out to service the domestic and foreign debt exceeded
budgetary allocation by Sh17.1 billion in the first quarter showing the
extent Kenya has to go to fill the holes created by the heavy borrowing
since 2013.
The confidence about Kenya’s future
economic stability is also anchored on diversification into the
extractive sector especially after the discovery of oil. However, the
roadmap to realising these prospects also remain in
The
CS was confident that borrowing from China has the advantage of turning
to benefits fast even though the World Bank believes Kenya’s borrowing
from the Asian country risks worsening the debt burden for the country.
China’s
loans to Kenya (some of which are concessional) have been growing by 54
per cent a year between 2010 and 2014 with some of the credit having
high interest rates, according to a research paper by World Bank
economists.
In contrast, Kenya’s loans from its
traditional foreign markets of Japan and France stagnated or declined.
The bulk of the borrowing from China is for the SGR.
“A
feature of the Chinese’ modus operandi you may have noticed is how
quickly they can deliver the economic asset to specifications. This has
meant that the asset’s cost is partly mitigated by how quickly the loan
converts to economic benefit from the use of the created asset,” Mr
Rotich said.
“A good example of this is the rapid construction and likely completion (ahead of schedule) of the SGR project.”
Experts
agree that Kenya may have to extend repayment period for most
especially when the Eurobond matures in 2024. Longer repayment periods
mean more interest on the loans.
The country has also
secured a cushion in a Sh150 billion from the International Monetary
Fund meant to guard against economic shocks. In 2014, Kenya was among
the several African economies that floated Eurobonds.
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