Concern raised over soaring debt and decreasing development cash

The National Treasury building in Nairobi. FILE PHOTO | NMG 

In Summary

• Payment for the first Eurobond is set to increase by Sh7.5 billion, says advisers.
• Budget office warns that trend is bad for economy which is recovering following 2017 elections.

By JOHN NGIRACHU
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Higher interests on debts and redemptions have pushed up Kenya’s payments of debts by Sh27.6 billion, forcing Treasury to reduce development spending, according to an analysis of the
Supplementary Budget currently before the National Assembly.

Kenya has been forced to pay higher interests on the first Eurobond and loans taken from the Standard Chartered Bank and the Eastern and Southern Africa Trade and Development Bank.

Debt repayments are usually budgeted for at the beginning of the financial year and the changes with just two months to the end of the year, have sparked concerns in the Parliamentary Budget Office (PBO), the experts who advise MPs on budget issues.

“Development spending is decreasing significantly yet borrowing has increased substantially, raising concerns that borrowed funds could be used to fund recurrent expenditure,” PBO has said in a report to MPs.

Interests on debts have increased by Sh19.2 billion from Sh70.5 billion because of the adjustment of terms on the first Eurobond, the loan taken from Standard Chartered Bank and another from the Eastern and Southern African Trade and Development Bank.

Payment for the first Eurobond will increase by Sh7.5 billion, that of Standard Chartered by Sh4.8 billion and the Eastern and Southern African Trade and Development Bank by Sh7 billion.

Payment for external loans will increase by Sh1.2 billion, said the PBO, and this is because some lenders refused to adjust payment terms on their loans and asked to be paid when they were due.

There has also been an increase of Sh5.1 billion in the payments for domestic debt.

With the second Supplementary Budget seeking to increase recurrent expenditure by Sh23.2 billion and reduced development expenditure by Sh40 billion, PBO is of the opinion that the increased spending on debt should be a major concern.

“Government spending cuts should ideally lead to a reduction in borrowing and total public debt,” the office said, “but we are seeing a trend where expenditure is cut, more so, development expenditure, but borrowing and public debt are increasing.”

The country continues to incur debt, far above the original estimated figure, said PBO, and this raises concerns that the borrowed funds could be channelled towards recurrent spending, resulting in negligible returns on investment.

PBO warned that with the country just recovering from a challenging economic period because of the lengthy electioneering period, the reduction in development spending is likely to slow down economic recovery.

So bad were the economic circumstances that growth of the Gross Domestic Product slowed to 4.8 per cent in 2017.

Revenue collection failed to meet the target by Sh85.9 billion, which Treasury said affected the disbursement of money to both the national and county governments.

READ: Kenyans to pay Sh323bn interest on Eurobond II

By February, just four months to the end of the financial year, counties had only received 35 per cent, slightly more than a third, of their equitable share of revenue.

The experts concluded that this “raises concerns on whether counties will receive their full amounts”.

“The Constitution provides that a county share of revenue raised by the national government shall be transferred to the county without undue delay and without deduction except if the stoppage is due to serious material breach of public finance management laws,” said the PBO.

In the Supplementary Budget, the second this financial year, the biggest beneficiaries are medical workers, police officers, teachers and university lecturers, whose salaries will be increased as per their collective bargaining agreements (CBAs).

READ: IMF warns over Kenya's rate in taking new debts

The Health ministry’s budget for recurrent expenditure has been increased by Sh18.1 billion, which is meant to cater for the salaries for health personnel as their CBAs are implemented.

The Teachers Service Commission will get an additional Sh16.3 billion to increase salaries after job evaluation and to recruit more teachers while the Department for University Education will get Sh5.7 billion to implement the CBA with the striking lecturers and other university staff.