Fiscal Deficits and Spiraling Public Debt in Kenya

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By CPA Pesh Gakuru

Virtually Every Government in The World Runs Budget Deficits and Incurs Public Debt

A budget deficit is the excess of planned Expenditure over and above the available resources. The additional revenue/income is necessary to meet the estimated Expenditure in full. In the case of a government, a budget deficit occurs when the proposed Expenditure on government programmes exceeds the revenue collected in a given financial year. The Financial Year starts on 1st July and ends on 30th June of the subsequent year.

Revenue sources for the Government include taxation, fines, stamp duty and levies. Deficit financing may be domestically or externally sourced. Domestic sources include commercial loans, borrowing from commercial banks, insurance companies, pension funds, and individual loans through the issuance of treasury bills and bonds. External financing from development partners and commercial banks may include syndicate loans, commercial loans, Eurobonds, and grants.

Public Debt refers to the Government’s Debt and includes domestic and external obligations.

The Kenyan Government details its spending plans through the Budget Policy Statement. The statement highlights the Government’s priority programmes, the economy’s current state, and the outlook for the future economic future as the basis for the budget preparation. It also contains the Budget Ceilings for the subsequent financial year and the medium term.

Background

Almost every Government in the world runs budget deficits and incurs public Debt to foster economic growth and development.  However, substantial public debts do interfere with the financial stability of a country. Unsustainable public deficits and public Debt threaten macroeconomic variables such as crowding out private/domestic investments, triggering high interest rates, impairing creditworthiness and ability to secure cheap financing options, depreciation of the currency, high inflation, and debt distress, among others.

Countries such as Germany, the USA and Britain have attained substantial economic growth and development despite budget deficits and public Debt supported by sound monetary policies. Public Debt has also caused economic turmoil in some countries, such as Greece and Zambia. 

In 2007 and 2009, Greece incurred substantial public Debt, which threatened the stability of its macroeconomic variables and its inability to attract funding for its programme. Its Public Debt to GDP stood at 103.1% and 126.8%, respectively, necessitating a bail-out from the European Union. 

Locally, Zambia defaulted on its Eurobond repayments in the year 2020. The rise in public Debt resulted from unsustainable macroeconomic policies, poor economic management, and high uptake of infrastructural projects financed by expensive loans amidst falling copper prices. Zambia has been negotiating with its creditors, mainly China, on parameters for debt relief with the help of the IMF to return to fiscal and debt sustainability.

The IMF Kenya’s Country Report of July 2023 put Kenya’s Public Debt to GDP ratio above the 55% threshold of Debt Sustainability. Kenya’s Public Debt to GDP was over 62% in the last three financial years. Most recently, Kenya was on the brink of defaulting on its repayment of the Eurobond, maturing in June 2024. However, this was resolved by issuing another Eurobond to retire it, albeit at higher interest rates. The Government has to look deeper into its financing options for future budgets because the Kenya Revenue Authority needs to catch up on its revenue targets in recent years and efforts to reduce external financing.

The Government continually identifies measures to put the economy on a recovery path. Among them is its resolve to rely on domestic sources of revenue especially new taxation measures to help manage debt. The public however feels that it is already overtaxed. How will the private investments that they make to compliment Government Spending happen, when their would-be savings are taken away, you may ask? When the Government over relies on domestic borrowing due to unrealized revenue targets, interest rates go up and crowd out Private Investment. 

Commencing the FY 2023/24, the Government has scaled down its spending plans. It plans to scale it down further in the upcoming 2024/25 Budget because of low revenue collections and pressing expenditure needs, notwithstanding the demand for salary increments by the medical fraternity and teachers. 

While the above move is commendable, the Government has had over-ambitious spending plans that resulted in numerous budget cuts midway through the budget implementation. This interferes with the timely realization/completion of planned Programmes, fosters pending bills for services and goods that have already been provided, and causes the likelihood of suffering penalties from donors on account of rescheduling projects, extension of agreements or unavailability of GoK Counterpart funding where required.  Austerity measures usually reflect the performance of the economy. However, numerous revisions of the Budget are an indicator of poor planning. It is, therefore, necessary that the current performance of the economy, future outlook on the economy regarding macroeconomic variables, and revenue performance are matched with realistic and sustainable budget expenditures that the user can implement without numerous calls for review of the current programmes under implementation.  Therefore, the proposed downward budget revision for the FY 2024/25 is a move in the right direction. What more should the Government do to bring the Public Debt and Budget Deficit Down? 

First, the Government should consider scaling down priority projects with huge cost implications to a few in any given year to take up new ones once the current/older projects are completed. Why were the SGR, the Expressway, major road bypasses, and the Nadapal –Nakodok road built nearly simultaneously? Taking up projects simultaneously implies signing agreements with donors and local financiers (read public debt) for each project and incurring higher financing costs due to rising indebtedness.

Secondly, the Government should seriously consider its appointment of top leadership in public institutions for the country’s economic well-being. The appointments should be based on merit, experience and track record. Why do corporations such as the National Oil Corporation, Kenya Broadcasting Corporation, Kenya Airways, Telkom Kenya and Kenya Power continue to make losses and receive financial bailouts amidst huge budgetary allocations when smaller firms in the Private Sector with fewer resources continue to outperform them? Perhaps Kenya Airways’ return to profitability is a result of the quality leadership it has at the moment.

Thirdly, Ministries, Departments and Agencies should only initiate projects that are thoroughly thought out in terms of requirements (stages, processes, significant inputs, public participation), including the capital outlay. This will hugely reduce GoK and donor financing agreements, numerous project cost variations, inability to utilize allocated funds that would otherwise have financed other projects, abandonment of projects and rejection of projects by communities due to lack/insufficient public participation.

Fourthly, the Government must take bold action to cut off wasteful expenditures from top to bottom.  The political class must not be seen to take wine while recommending water to the masses.  If the Government is keen on addressing the spiralling expenditures that threaten the public debt, perhaps they should consider; reducing the Ministries to the bare minimum without splitting them into many state departments; scrapping off of non-elective posts that are aimed at rewarding royalty; saving on costs.

Fifth, the Government needs to revamp its efforts to fight corruption. Runaway corruption denies the public essential programmes to improve their economic well-being.  The effect of corruption is that the Government has to either increase taxation, incur more borrowing to finance overpriced projects, extend project life or redo the projects.  There is a growing public perception that the fight against corruption is only being directed at the small fish. Therefore, The Government needs to do more to reassure the public of its commitment to tackle corruption across the social divide without politicizing the fight against corruption.

It is said that where there is a will, there is a way. The most significant way to reduce the budget deficit and public debt largely depends on the goodwill of the top leadership to make tough, deliberate decisions that will steer this country to economic prosperity through the economic and prudent utilization of available revenue resources and sustainable borrowing. When they answer this call, the others will follow.

Encl. Table 1: Statistics on Budget, Fiscal Deficit and Public Debt: FY 2020/21 -2024/25

Table 1: Statistics on Budget, Fiscal Deficit and Public Debt

Financial year2021/22 2022/23 2023/242024/25
ItemActualPreliminary ActualProjections 
Revenue Estimates2,199.82360.53070.63,435.0
Proposed Expenditure3027.83221.03902.94,188.2
Budget Deficit after adjustments 747.8770.3785.0703.9
Domestic Financing605.3 459.5422.7377.7
External Financing142.5310.8362.2326.1
PV of Public Debt to (as a % of GDP)63.164.461.960.2

Source: Budget Policy Statement (2024).

The Present Value of Public Debt to GDP ratio is above the 55% Public Debt Sustainability Role of Budgeting in Spurring Economic Growth and Development

Other Sources of Data: IMF website Email; [email protected]

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