Speaking truth with power:
Making truth powerful;
Making power truthful
Making truth powerful;
Making power truthful
Kenya’s public debt stock has sharply grown over the last decade owing to increased government borrowing to finance various development projects, mainly on infrastructure, energy and ICT. According to the Central Bank of Kenya, public debt increased fivefold from Ksh. 1.6 trillion in June 2012 to Ksh. 8.2 trillion in December 2021. The high debt levels have raised concerns over the ability to repay. There have also been concerns over the reasons for borrowing as there appears to be a mismatch between some of the government’s decisions and the needs of the people. This is bearing in mind that Kenyans are responsible for repaying the acquired debt.
Kenya’s current public debt stock is a mix of both external and domestic borrowing.
Domestic debt almost doubled from Ksh. 2.1 Trillion in June 2017 to Ksh. 4 trillion in December 2021. The government acquired loans mostly from local banks and other non-bank financial institutions such as Insurance Companies and Pension Funds. This is argued by economists to be crowding out private sector and credit available for MSMEs hence limiting growth prospects in the domestic front. Within this period, the average loan size advanced from Commercial Banks to MSMEs declined by 39% from 6.03 million in 2017 to Ksh 3.56 million in 2020[1].
The question of the debt situation in Kenya has now occupied public dialogue and is an issue of concern for policy makers and development partners.
Foremost, the high level of debt stock has increased debt servicing costs. Data from the National Treasury indicates that budget allocations for Consolidated Funds Services, within which debt servicing funds are earmarked, have increased from 21% in FY2016/17 to 36% in FY2021/2022. This has piled pressure on the government to raise more revenue to meet the increasing expenditure needs. As such, the taxman has sought new tax amendments to increase revenue collection although this has come at the expense of taxpayers. Some of these include adjustments in the VAT rates and excise duty for some products, and the introduction of new taxes such as Digital Service Tax and the 1% Minimum Gross Sales Tax (which was suspended by the High Court). These tax amendments, while aimed at garnering more revenue, have increased the cost of acquiring mobile thus raising the cost of doing business. Moreover, the tax hikes have contributed to an increase in the cost of living by raising the price of commodities such as cooking gas, airtime and data among others.
Beyond the increase in taxation, Kenya’s debt servicing has implications on the quality of public service. The government has been forced to strike a balance between meeting loan repayment obligations and providing public utilities to its citizens. Loan repayment has been competing the available revenue that government allocates to the various sectors of the economy. Whilst allocations to vital sectors such as education, health, social protection and agriculture have increased by an average of 34% during the period between 2016 to 2021, there have been shifts in sectoral needs resulting from changes such as increased population, prevalence of cancer and climate change. With the budgetary allocations being inadequate in addressing most of these changes, some of the services from such sectors remain costly, insufficient and of poor quality.
Debt servicing has also impacted the amount of revenue that is disbursed to County Governments by decreasing the available sharable revenue. Although there has been an increase in the allocations since devolution, there was a stagnation in the revenue allocations to counties for FY 2019/20 and FY 2020/21 with monies for towards village polytechnics, healthcare (building level 5 hospitals and leasing of medical equipment ) remaining stagnant.[2] This has affected the quality of delivery of county services. For example, some county hospitals are understaffed and lack essential medicines, leading to strikes by health workers and further worsening health care delivery. There have also been delays in the disbursement of funds from the Treasury[3], further limiting most of the county functions. This has resulted in delays in payment of salaries and wages for both County staff and suppliers delivering goods and services to counties.
Debt servicing has also had forex implications. Foreign creditors are normally insured from fluctuations in currency exchange rates during debt repayment by lending in foreign currency and having the debtor repay in the same foreign currency. As of June 2021, 66% of the total Kenyan external debt was held in US Dollars. Debt servicing affects the foreign exchange markets by eroding the country’s dollar reserves, consequently inducing dollar shortages. This is evident in the dollar shortages experienced by Kenya’s Forex market over the past few months. The shortage has impacted the operations of manufacturers who source materials from abroad by disrupting payments to foreign suppliers. An example of the impact of dollar shortage is the disruption of business for Kapa Oil Refineries[4] and temporary closure of Pwani Oil[5], both manufacturers of cooking oil which is a basic commodity for all households. This has a ripple effect of further increasing the price of cooking oil beyond the increased prices occasioned by the Russia-Ukraine war (which inflated Palm Oil Costs)[6]. Additionally, the temporary closure of Pwani Oil means the loss of income for the employed staff, and a decline in tax revenues for the taxman.
Beyond the closure of manufacturing companies, the dollar shortage has induced uncertainties which could potentially repulse Foreign Direct Investment and deny the government tax revenues, among other benefits such as job creation, which could have been incurred from such ventures. The weakening of the Kenyan shilling is also likely to see more investors exit the country even as is the case right now due to uncertainties posed by the August election. Further depreciation in exchange rates poses a risk of increasing the costs incurred in repaying the loans. This is because the country spends more shillings to make loan interest payments as the shilling continues to depreciate against the dollar.
Kenya being indebted poses the risk of the creditors imposing demands on some of the operations of the country. There has been an increase in the number of Chinese workers involved in various infrastructural projects let alone those who reside in Kenya. Cases of workers facing racism and discrimination from Chinese employers have also been on the rise. Another example is the “trade war” that arose in 2018 due to Kenya’s ban on China’s cheap excessive fish exports which were hurting the local fish market. This caused tension between the two countries with fears of China cutting the funding for the Naivasha-Kisumu Standard Gauge Railway.[7]
Choices have consequences. Since the loan contracts are binding, Kenya has to continue servicing the debt until all the borrowed funds have been settled. The next government coming in September 2022 has a herculean task, that must begin with fiscal consolidation and renegotiation of the terms of already acquired loans. The government must also rationalize public expenditure and unnecessary expenditure that eats into the limited revenues and necessitates further borrowing. Also, ensuring the borrowed funds are well invested in viable projects will save the country from repaying loans which have not benefitted the citizens. This can be attained by the Parliament stepping up on its oversight role as mandated by the Debt and Borrowing Policy, 2020.
Legislators and civil society should also advocate for the development and enactment of policies that guide citizen participation in decisions around procurement and utilization of debt. As the electoral campaigns are underway, citizens should exploit this opportunity to demand that leading contenders make commitments in their manifestos to address of the country’s public debt problem. Citizens must also live up to their role obligations – to learn and engage more on issues of public finance. Think tanks and Experts in Public Finance could help in this by increasing access to information on public debt and educating citizens on the issues of Public debt and Public Finance more generally.
We all have a role to play in addressing this issue of public debt. Let’s get involved!
[1] Central Bank of Kenya. 2020 MSME FinAccess Business Survey Report https://www.centralbank.go.ke/uploads/banking_sector_reports/1275966539_2020%20Survey%20Report%20on%20MSME%20Access%20to%20Bank%20Credit%20-%20Final%20-%2015%2007%2021.pdf
[2] https://www.standardmedia.co.ke/nairobi/article/2001374846/total-allocations-to-counties-drop
[3] https://nation.africa/kenya/news/workers-face-tough-times-as-pay-delays-hit-counties-3377808?view=htmlamp
[4] https://www.businessdailyafrica.com/bd/economy/kapa-oil-operates-below-capacity-on-lack-of-dollars-shortage-3841578
[5] https://kenyanwallstreet.com/pwanil-oils-cannot-access-oil-due-to-shortage/
[6] https://kenyanwallstreet.com/cooking-oil-prices-rise-as-palm-costs-rise-33/
[7] https://nation.africa/kenya/news/china-threatens-to-withhold-sgr-funds-over-hostility--104038
Kenya’s public debt stock has sharply grown over the last decade owing to increased government borrowing to finance various development projects, mainly on infrastructure, energy and ICT. According to the Central Bank of Kenya, public debt increased fivefold from Ksh. 1.6 trillion in June 2012 to Ksh. 8.2 trillion in December 2021. The high debt levels have raised concerns over the ability to repay. There have also been concerns over the reasons for borrowing as there appears to be a mismatch between some of the government’s decisions and the needs of the people. This is bearing in mind that Kenyans are responsible for repaying the acquired debt.
Kenya’s current public debt stock is a mix of both external and domestic borrowing.
Domestic debt almost doubled from Ksh. 2.1 Trillion in June 2017 to Ksh. 4 trillion in December 2021. The government acquired loans mostly from local banks and other non-bank financial institutions such as Insurance Companies and Pension Funds. This is argued by economists to be crowding out private sector and credit available for MSMEs hence limiting growth prospects in the domestic front. Within this period, the average loan size advanced from Commercial Banks to MSMEs declined by 39% from 6.03 million in 2017 to Ksh 3.56 million in 2020[1].
The question of the debt situation in Kenya has now occupied public dialogue and is an issue of concern for policy makers and development partners.
Foremost, the high level of debt stock has increased debt servicing costs. Data from the National Treasury indicates that budget allocations for Consolidated Funds Services, within which debt servicing funds are earmarked, have increased from 21% in FY2016/17 to 36% in FY2021/2022. This has piled pressure on the government to raise more revenue to meet the increasing expenditure needs. As such, the taxman has sought new tax amendments to increase revenue collection although this has come at the expense of taxpayers. Some of these include adjustments in the VAT rates and excise duty for some products, and the introduction of new taxes such as Digital Service Tax and the 1% Minimum Gross Sales Tax (which was suspended by the High Court). These tax amendments, while aimed at garnering more revenue, have increased the cost of acquiring mobile thus raising the cost of doing business. Moreover, the tax hikes have contributed to an increase in the cost of living by raising the price of commodities such as cooking gas, airtime and data among others.
Beyond the increase in taxation, Kenya’s debt servicing has implications on the quality of public service. The government has been forced to strike a balance between meeting loan repayment obligations and providing public utilities to its citizens. Loan repayment has been competing the available revenue that government allocates to the various sectors of the economy. Whilst allocations to vital sectors such as education, health, social protection and agriculture have increased by an average of 34% during the period between 2016 to 2021, there have been shifts in sectoral needs resulting from changes such as increased population, prevalence of cancer and climate change. With the budgetary allocations being inadequate in addressing most of these changes, some of the services from such sectors remain costly, insufficient and of poor quality.
Debt servicing has also impacted the amount of revenue that is disbursed to County Governments by decreasing the available sharable revenue. Although there has been an increase in the allocations since devolution, there was a stagnation in the revenue allocations to counties for FY 2019/20 and FY 2020/21 with monies for towards village polytechnics, healthcare (building level 5 hospitals and leasing of medical equipment ) remaining stagnant.[2] This has affected the quality of delivery of county services. For example, some county hospitals are understaffed and lack essential medicines, leading to strikes by health workers and further worsening health care delivery. There have also been delays in the disbursement of funds from the Treasury[3], further limiting most of the county functions. This has resulted in delays in payment of salaries and wages for both County staff and suppliers delivering goods and services to counties.
Debt servicing has also had forex implications. Foreign creditors are normally insured from fluctuations in currency exchange rates during debt repayment by lending in foreign currency and having the debtor repay in the same foreign currency. As of June 2021, 66% of the total Kenyan external debt was held in US Dollars. Debt servicing affects the foreign exchange markets by eroding the country’s dollar reserves, consequently inducing dollar shortages. This is evident in the dollar shortages experienced by Kenya’s Forex market over the past few months. The shortage has impacted the operations of manufacturers who source materials from abroad by disrupting payments to foreign suppliers. An example of the impact of dollar shortage is the disruption of business for Kapa Oil Refineries[4] and temporary closure of Pwani Oil[5], both manufacturers of cooking oil which is a basic commodity for all households. This has a ripple effect of further increasing the price of cooking oil beyond the increased prices occasioned by the Russia-Ukraine war (which inflated Palm Oil Costs)[6]. Additionally, the temporary closure of Pwani Oil means the loss of income for the employed staff, and a decline in tax revenues for the taxman.
Beyond the closure of manufacturing companies, the dollar shortage has induced uncertainties which could potentially repulse Foreign Direct Investment and deny the government tax revenues, among other benefits such as job creation, which could have been incurred from such ventures. The weakening of the Kenyan shilling is also likely to see more investors exit the country even as is the case right now due to uncertainties posed by the August election. Further depreciation in exchange rates poses a risk of increasing the costs incurred in repaying the loans. This is because the country spends more shillings to make loan interest payments as the shilling continues to depreciate against the dollar.
Kenya being indebted poses the risk of the creditors imposing demands on some of the operations of the country. There has been an increase in the number of Chinese workers involved in various infrastructural projects let alone those who reside in Kenya. Cases of workers facing racism and discrimination from Chinese employers have also been on the rise. Another example is the “trade war” that arose in 2018 due to Kenya’s ban on China’s cheap excessive fish exports which were hurting the local fish market. This caused tension between the two countries with fears of China cutting the funding for the Naivasha-Kisumu Standard Gauge Railway.[7]
Choices have consequences. Since the loan contracts are binding, Kenya has to continue servicing the debt until all the borrowed funds have been settled. The next government coming in September 2022 has a herculean task, that must begin with fiscal consolidation and renegotiation of the terms of already acquired loans. The government must also rationalize public expenditure and unnecessary expenditure that eats into the limited revenues and necessitates further borrowing. Also, ensuring the borrowed funds are well invested in viable projects will save the country from repaying loans which have not benefitted the citizens. This can be attained by the Parliament stepping up on its oversight role as mandated by the Debt and Borrowing Policy, 2020.
Legislators and civil society should also advocate for the development and enactment of policies that guide citizen participation in decisions around procurement and utilization of debt. As the electoral campaigns are underway, citizens should exploit this opportunity to demand that leading contenders make commitments in their manifestos to address of the country’s public debt problem. Citizens must also live up to their role obligations – to learn and engage more on issues of public finance. Think tanks and Experts in Public Finance could help in this by increasing access to information on public debt and educating citizens on the issues of Public debt and Public Finance more generally.
We all have a role to play in addressing this issue of public debt. Let’s get involved!
[1] Central Bank of Kenya. 2020 MSME FinAccess Business Survey Report https://www.centralbank.go.ke/uploads/banking_sector_reports/1275966539_2020%20Survey%20Report%20on%20MSME%20Access%20to%20Bank%20Credit%20-%20Final%20-%2015%2007%2021.pdf
[2] https://www.standardmedia.co.ke/nairobi/article/2001374846/total-allocations-to-counties-drop
[3] https://nation.africa/kenya/news/workers-face-tough-times-as-pay-delays-hit-counties-3377808?view=htmlamp
[4] https://www.businessdailyafrica.com/bd/economy/kapa-oil-operates-below-capacity-on-lack-of-dollars-shortage-3841578
[5] https://kenyanwallstreet.com/pwanil-oils-cannot-access-oil-due-to-shortage/
[6] https://kenyanwallstreet.com/cooking-oil-prices-rise-as-palm-costs-rise-33/
[7] https://nation.africa/kenya/news/china-threatens-to-withhold-sgr-funds-over-hostility--104038
