How Kenya can reduce SGR and other debts’ burden

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By Mbatau wa Ngai

Kenya’s debt burden stood at Sh6 trillion in the first week of November 2019 and is edging closer to levels considered unsustainable even for a country with a Gross Domestic Product (GDP) growing at about 5.6 per cent.

This means that the debt owed by every Kenyan has increased three-fold to Sh115, 690 from Sh42, 215 when President Uhuru Kenyatta government came to power in 2013. The irony is that the collective and
individual debts burden is growing at a time when incomes are increasing only marginally as the country’s output has not kept up with income for every Kenyan during this period.

This should not have come as a surprise to policy makers because the funding of infrastructure projects such as roads and railways only pays off in the medium to long-term. This explains why it is imprudent, to put it mildly, to borrow expensive commercial loans to fund them. Yet, this is what the country has done over the past few years the country’s stock of expensive loans rose to 36 per cent of the total debt, from 24 per cent in June 2016. The result was that the fraction of cheap loans from multilateral lenders such as
the World Bank reduced from 45 per cent three years ago to 30 per cent.

Commercial loans crossed the trillionmark after the country successfully issued a third Eurobond, a dollar denominated sovereign bond, from which it raised.

The net effect of the country leadership’s growing appetite for expensive commercial loans is a rapid increase in interest payments because they come with harsh terms, have a shorter repayment periods, higher interest rates and little or no grace period.

Under normal circumstances, the growing appetite for these loans should raise red flags because the terms under which they are given are open to abuse.

As it is, the country is awash with stories of how individuals charged with the responsibility of raising these loans and their use have played fast and loose with the funds.

Indeed, the issuance of the first Eurobond raised questions that may never be satisfactorily answered as its architects were hounded out of office and are awaiting trial on other questionable dealings they
are alleged to have masterminded at the Treasury. The only logical conclusion from Kenya’s recent experience of growing its GDP by 6.3 per cent in 2018 while the number of jobs generated fell to a six-year
low in 2018 and private firms are competing to shed off jobs simply to remain afloat is that State House and Treasury mandarins need to wake up from their slumber.

They need to burn the midnight oil to come up with strategies that will grow the economy in a way that yields higher taxes. While they are at it, the mandarins may also consider changing the country’s economic
structure to bring in greater equity in the distribution of the wealth created.

The latest data from the Kenya National Bureau of Statistics (KNBS) shows that the number of employed Kenyans earning more than Sh100,000 per month rose by 4.1 per cent last year and hit 79,982,
recording the highest growth among salaried workers and further entrenching income inequality.

The disquieting reality that the country has to come to grips with is that this category represents only 2.9 per cent of the entire work-force meaning the bulk of employed Kenyans fall below this
threshold with the bottom of the pyramid representing those earning barely enough to cover their basic needs. This means the economy must be structured in a manner that workers at the bottom of the pyramid
earn decent wages that will stimulate demand for goods and services—preferably produced locally.

And it goes without saying the only way wages can be increased without sparking off a rise in inflation and driving companies out of business is by raising industrial and labour productivity.

The urgency to carry out the necessary reforms should be driven by the realization that Kenya, like its neighbours, has lagged behind in industrial technology and risks being swamped by imports from countries
that have embraced the fourth industrial revolution.

The latest data from the Kenya National Bureau of Statistics (KNBS) shows that the number of employed
Kenyans earning more than Sh100,000 per month rose by 4.1 per cent last year (2018) and hit 79,982, recording the highest growth among salaried workers and further entrenching income inequality.

According to experts who spoke at an industrial conference at the East African Community (EAC) Secretariat in Arusha, Tanzania, in November 2019, for the region to achieve inclusive and sustainable
industrial growth it needs to invest in disruptive technologies like 3-D printing, Internet of Things, advanced robotics and drones that make manufacturing smarter, more efficient and greener.

Whether the country likes it or not and irrespective of whether its leaders think it is affordable or not, it has to play catch up with industrialized countries which currently account for 90 per cent of digital production technologies and have invested heavily in research and development.

And given the huge amounts of money required to buy and install modern technology, the government may have to bite the bullet and get back into establishing industries especially in sectors it has identified as offering the best growth prospects.

There should be no shortage of foreign and local development partners willing to go into business with the government as one of President Kenyatta’s Big Four Agenda items—housing—has demonstrated.

The sectors the government has identified such as textiles and leather have huge multiplier effects –upstream and downstream—and the Ministry of Industrialization should get move fast to prepare bankable projects then invite other partners. The increased earnings that would go into the pockets of farmers and workers producing the raw materials for these industries would give the economy a much needed boost.

The urgency of increasing labour productivity is underlined by the realization that Kenyan workers are less productive than their counterparts in Uganda and Ethiopia.

The upshot of all this is that Kenya’s lower gross domestic product (GDP) per person employed accounts for the country’s failure to reach the 10 per cent growth target set by the Jubilee Government when it came to power in 2013.

This also means that the government’s failure to tackle this challenge with sufficient vigour while pouring out trillions of shillings into mega-infrastructure projects are to blame for the current conundrum where the country records decent GDP growth rates amidst growing joblessness and continued lay-offs. To
its credit, the government seems to have recognized that it needs to do something to spur economic growth.

Recently, President Kenyatta chaired a cabinet meeting approved Business Laws (Amendment) Bill, 2019 aimed at improving the business environment so as to attract more investment by raising the country’s ranking in the World Bank Ease of Doing Business Index to position 50 by 2020

Recently, President Kenyatta chaired a cabinet meeting approved Business Laws (Amendment) Bill, 2019 aimed at improving the business environment so as to attract more investment by raising the country’s ranking in the World Bank Ease of Doing Business Index to position 50 by 2020.

The cabinet also approved the National Cooperative Policy which establishes an institutional framework for enhanced coordination of cooperative societies while also seeking to deepen deployment of
ICT in management of Sacco’s as well as promote good corporate governance.

Acting Treasury Cabinet Secretary Ukur Yatani also appears to be doing his part to improve cash-flow among companies that do business with the government by threatening to cut off cash disbursements to counties that have ignored President Kenyatta’s Madaraka Day call to settle outstanding bills.

The acting CS also warned ministries, departments and agencies (MDAs) that they have no discretion on whether to pay the verified but outstanding bills as they should form a first charge on the 2019/2020 budgetary allocation before entering into new commitments. Analysts opine that Yatani’s tough stand should be supported from the highest office in the land because the failure by county governments and
MDAs to pay outstanding debts estimated at Sh225 billion has reduced overall spending and slowed down business activity in the economy.

President Uhuru Kenyatta Chairs a Cabinet Meeting in State House Photo: State House Kenya on Twitter

Indeed, a number of organizations, including the World Bank Group, the Kenya Private Sector Alliance (Kepsa) and Kenya Association of Manufacturers (KAM) blame mounting public bills for strangling cash supply in the economy and hurting corporate profitability and leading to job losses. Kepsa had argued
more forcefully in mid-year that pending bills had compounded cash flow challenges for companies that have since September 2016 been grappling with reduced access to credit due to enforcement of ceilings on
loan charges.

Although the President repealed the rate-cap law, it is expected that credit will take some time to flow to companies because the government is still borrowing heavily on the domestic financial markets to meet its ballooning needs. The nearwidespread failure to pay bills on time has spread to the private sector itself and to individuals exposing the entire economy to the risk of grinding to a halt.

The Small and Medium-Sized nterprises (SMEs) have suffered the brunt of this failure to pay up and good
number of these businesses has been driven out of business. Yet, this is the sub-sector that generates the bulk of Kenya’s new jobs and controls much of the businesses that touch the lives of ordinary citizens.

Their continued financial well-being should, therefore, be a concern for policymakers sitting in their air-conditioned offices who should, at the very least, do nothing that hurts SMEs. The imposition
of unnecessary levies and taxes should also be addressed as should the inordinately high cost of power which accounts for almost a quarter of the manufacturers’ cost of production. The government needs
to move with speed to root out the cause of these high power costs including the retiring of thermal power producers whose prices are extremely high compared to hydro, wind and solar.

The question that the government needs to ask the Independent Power Producers (IPPs) and the individuals who licensed them is to explain how contracts that were supposed to be short-term—
to supply emergency power during the time of drought—has come to be almost permanent. This enquiry might well demonstrate that some—if not all—these contracts were questionable and can be
terminated without the country having to pay the huge sums of money that have been bandied about to scare the government from doing what is right for its people.

In the event that the IPPs have proved they have valid contracts, then the lawyers who prepared and signed them on behalf of the government should be required to show why they should not be booted out
and, perhaps, even prosecuted for giving the public a raw deal. Analysts are still unanimous that the IMF was right when it projected Kenya’s economy to reach Sh10.1 trillion this year and to hit the Sh15.7
trillion- mark by 2023.

This would drastically reduce the percentage of the country’s debt –to GDP ratio from the current 66 per cent to an estimated 38 per cent, all things being equal. That would bring a major relief to the country and its people whose personal incomes would also have grown substantially.

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