Should we resort to belt-tightening measures?
By Mbatau wa Ngai
National Treasury Cabinet Secretary Ukur Yatani delivered the Sh2.7 trillion 2020/2021 annual budget in a tone that can best be described as a triumph of hope over experience. This success of the budget is hinged on Kenya Revenue Authority’s (KRA) ability to meet its collection target of Sh1.62 billion in the midst of the Covid-19
epidemic when it has manifestly failed to meet past targets.
In the financial year ended June, 2020, for example, the tax body missed its half year tax collection target by Sh88.3 billion, netting Sh 857.8 billion over the period before the outbreak of the coronavirus epidemic.
The Cabinet Secretary’s hopes of borrowing close to Sh 400 billion from external sources without taking up expensive commercial loans which have become the soft underbelly of the economy may be dashed by the urgent needs of the country’s development partners to shore up their own struggling economies.
The Cabinet Secretary’s efforts to borrow from external markets may be hobbled by the International Monetary Fund‘s (IMF), decision to down grade Kenya’s credit rating as the country inches closer to the edge of default. According to the IMF, the country’s risk of default is now high, a deterioration from moderate.
The fact that this deterioration is due to the impact of Covid-19 crises which has exacerbated the existing debt vulnerabilities is of little consequence to lenders despite virtually all of them being hit by the same
epidemic that has swept across the world like wild fire. Kenya must still pay them their pound of flesh.
The country might soon rue the day its finance CS advised it to turn down the Group of 20 (G20) offer to momentarily stop the repayment of its debts in the wake of the global outbreak of the coronavirus epidemic.
This would have saved the country Sh71 billion. The CS argued then that accepting the offer would have been at the expense of favourable credit rating which would have led to a tightening of lending
At the very least, the MDAs who have failed to utilize the borrowed donor funds should be asked to explain why they should be allocated more funds for new projects this time round when they have earlier ones that they are not implementing.
But Mr Yatani can ease pressure exerted on him to hit foreign shores with a cup in hand provided he, and resident Uhuru Kenyatta, can find the political courage to whip Ministries, departments and Agencies (MDAs) to implement the projects for which there is Sh1.1 trillion to be drawn in concession loans and grants.
As it is, the country is already paying about Sh 2.6 billion annually in commitment fees for these loans that are sitting in various lenders’ books. At the very least, the MDAs who have failed to utilize the borrowed donor funds should be asked to explain why they should be allocated more funds for new projects this time round
when they have earlier ones that they are not implementing
The Cabinet Secretary may also require the office of the director-general of debt management headed by Haron
Sirma to burn the midnight oil in getting lenders to re-structure their loans even as he appeals to development partners for new ones.
The restructuring of these loans would reduce pressure on Treasury to come up with Sh904 billion required to
repay them this year.
To their credit, three bilateral lenders, the World Bank, the IMF and Africa Development Bank (AfDB), have
already opened their wallets to the country by lending well over Sh200 billion to mitigate the impact of Covid-19 and have indicated more funds will become available as needed.
What is even more startling, the Bretton Woods institutions have become Mr Yatani’s cheerleaders as he prepares to hit the road in search of foreign loans. According to them, even a government that is dancing on the edge of a precipitate and is staring a default on the repayment of foreign loans—especially commercial ones—like Kenya deserves a break as its leaders cannot be expected to stand by as its economy collapses.
“When the economy is doing badly it would be foolish for a government to step back and not provide fiscal stimulus”, the outgoing World Bank Country Director Felipe Jaramillo was recently quoted as saying Mr Jaramillo added a rider, however, and said the government should go back to belt-tightening measures which may explain the alacrity with which Mr Yatani announced his intention to roll back some exemptions President Kenyatta extended to individuals and the business community in the over Sh53 billion stimulus package in May.
To their credit, three bilateral lenders, the World Bank, the IMF and Africa Development Bank (AfDB), have already opened their wallets to the country by lending well over Sh200 billion to mitigate the impact of Covid-19 and have indicated more funds will become available as needed.
It may also explain the CSs re-introduction of Value Added Tax (VAT) on cooking gas, some agricultural inputs, tools and machinery during his reading of the budget.
Despite Mr Yatani’s eagerness to meet the development partners’ conditions, the road to attracting the necessary
concession loans and grants will be hampered by the rapid deterioration of its credit rating not just from the IMF
but also from the international sovereign credit rating agencies such as Moodys.
Kenya’s rapid fall from grace can be traced back to the leaders’ voracious appetite for mega projects many of which have, unfortunately, not only been overpriced but whose return on investment is somewhere between mid-to-long term. This means these projects do not generate enough revenues to repay the loans borrowed to build them even when there is a grace-period of up to five years.
President Uhuru Kenyatta’s government stands in the dock accused of accumulating Sh3.6 trillion during its first six years when the then CS Henry Rotich and his merry-men presided over the country’s finances at the Treasury. By December 2019, the country’s public debt had limbed to Sh 6.2 trillion which translates to 63 per cent of Kenya’s Gross Domestic Product (GDP). \
The President has, however, strenuously defended this huge accumulation of debt from Sh1.8 trillion when he took office to Sh5.89 trillion by July last year. He told CNN’s journalist Richard Quest in an interview carried out in 2019 that the money borrowed was used to build railways, ports, power lines, dams and many other infrastructure projects.
“What would worry me, is if the debt that we have incurred has gone into recurrent expenditure, into paying salaries or electricity bills. But what we have utilized our loans for is to close the infrastructure gap”, said the President.
But analysts believe these loans should still worry the President because the closing of the infrastructure gap has not translated into getting money into the pockets of ordinary Kenyans who, however, are required to tighten their belts to pay for their construction.
The pain for these ordinary Kenyans is heightened by the fact that the loans to build the much-hyped infrastructure were borrowed commercially at high interest rates and with shorter maturity
But analysts believe these loans should still worry the President because the closing of the infrastructure gap has not translated into getting money into the pockets of ordinary Kenyans who, however, are required to tighten their belts to pay for their construction. The pain for these ordinary Kenyans is heightened by the fact that the loans to build the much-hyped infrastructure were borrowed commercially at high interest rates and with shorter maturity periods.
It may be of interest to note that the size and, perhaps, composition of the repayments has caught the attention of the National Assembly.
In a report, the Budget Committee noted that the debt repayment expenses in the 2020/2021 budget constitute the largest portion of the Consolidation Fund Services (CFS).
“The committee has established that the cost of the debt financing actually consumes more financial resources than the development expenditure for which the debt is obtained,” read part of the report.
The net result is that the country will be borrowing money to repay the debt it had earlier incurred. It does not help that these debts are usually denominated in American dollars whose value in relation to other global and local currencies goes up whenever there is, or even a threat, of a global financial crises.
This is because Americans quickly sell of the assets they hold on other countries and repatriate the proceeds back home. Kenya had a taste of this in April when investors pulled out about Sh11.6 billion from the Nairobi Securities Exchange (NSE) in two months.
This explains concerns raised by analysts that the budget did not demonstrate the country has learnt any lessons in financing its development of infrastructure projects with foreign debts.
According to these analysts, the country has to go back to the drawing board and come up with a development model that will put money into ordinary Kenyans pockets.
This would require that any borrowed funds be used to finance projects that have high and immediate returns to
repay the loans borrowed while also stimulating the local economy by buying local materials and employing people. The country should put behind it the era of bringing in thousands of foreigners and hundreds of tons of materials to build infrastructure projects financed by equally foreign loans which must be repaid even during times when the world is battling a pandemic.
In contrast, the agriculture ministry was allocated Sh52.8 billion, only a small increase from last year’s allocation of Sh51.7 billion.
To add salt to the wound, the bulk of the money allocated to the agriculture ministry will go to finance the recurrent budget expenses leaving only a paltry Sh6.5 billion for small-scale farmers in subsidies
to farm in-puts and to expand community house-hold irrigation.
It has not been lost on these analysts that these two programmes have been beset with controversy amid accusations that they benefit only well-connected and wellheeled farmers leaving their small-scale colleagues to fend for themselves.
Yet, despite these well-documented and publicized complaints, the Finance CS gave no indication that the government has come up with any remedial measures such as a fraud-free distribution system for subsidized farm in-puts.
By Mbatau wa Ngai