Kenya’s runaway debt an unnecessary burden on future generations

By Mumbi Mutoko

As Kenya’s debt levels soar, concerns are rising about the nation’s ability to navigate its present financial quagmire. The most recent data from the Treasury reveals that Kenya’s total public debt has surpassed the 10 trillion shilling mark, clocking Sh10.1 trillion as of June 30, 2023, raising red flags about the country’s fiscal sustainability.

The surge in public debt is attributed to various factors, including external loan disbursements, exchange rate fluctuations, and the uptake of both domestic and external debt, making the servicing these loans increasingly burdensome. With the Kenyan shilling’s value plummeting to record lows, currently trading at around 151 shillings to the dollar, the cost of repaying these loans has surged.

In the year ending in June, Kenya incurred a debt premium of Sh391 billion. The lion’s share of this hefty sum, amounting to Sh107 billion, went to China. The consequences of this escalating debt load are not lost on global credit rating agencies. Fitch Ratings, for instance, downgraded Kenya’s ability to repay international lenders from “stable” to “negative” last month, citing concerns over rising taxes and social unrest.

In June, MPs voted to transition from a fixed debt ceiling in shillings to a proportion of the country’s gross domestic product (GDP) in a bid to contain the situation, but this proposed amendment is pending approval from the Senate.

Can Ruto steer the ship?

“The increase in the public debt is attributed to external loan disbursements, exchange rate fluctuations, and the uptake of domestic and external debt,” the Treasury says, underscoring the dire state of the economy and the government’s high appetite for loans.

The debt load has prompted warnings from global credit ratings agencies, including Fitch Ratings, which last month downgraded Kenya’s ability to repay international lenders from “stable to negative,” citing tax hikes and social unrest.

President William Ruto, who took office in September last year, rode to power on a promise to rejuvenate Kenya’s economy, amid a slowed down economic growth rate – down from 7.6 percent to 4.8 percent in 2022.

He promised, among other things, to slash government debt and introduce policies putting money in the pockets of impoverished Kenyans. However, his first act after taking office in September last year was to cut food and fuel subsidies introduced by his predecessor, Uhuru Kenyatta, saying he preferred subsidizing production instead of consumption.

In June, Ruto introduced new taxes that increased prices for basic goods such as fuel, food, mobile money transfers, and a controversial levy on all taxpayers to fund a housing scheme. And, in an unexpected U-turn, his administration reinstated a fraction of the fuel subsidy his government had scraped following several rounds of deadly anti-government protests and public anger over the high
cost of living.

Subsidies go against IMF debt conditions

“The expectations of higher international oil prices and the possibility of further shilling weakness will test the government’s commitment to contain fuel prices in the coming months,” think tank Oxford Economics Africa said last month, adding that the reinstated fuel subsidy went against the wishes of the IMF, a major lender for Kenya.

Kenya is one of the most dynamic economies in East Africa but about a third of the population lives in poverty. Inflation in Kenya has remained high, at an annual rate of 7.3 percent in August.

Ruto has insisted the tax hikes are needed to create jobs and fill government coffers and ease over-reliance on borrowing.

Since June 2013, interest payments have risen eight times from Sh121.3 billion as the country went on a borrowing spree to finance mega projects such as the standard gauge railway (SGR).

The sharpest increase has come in the form of high foreign interest payments which have increased by 2,355 percent from Sh11.1 billion in the financial year 2012/13 to Sh272.5 billion in 2023.

Dishonest

Economic expert Dr Patrick Muinde says claims by the Ruto government that it inherited unsustainable debt from Uhuru Kenyatta’s government aren’t accurate.

‘’The Controller of Budget report explains that the debt as of June 2022 was at Sh8.63 trillion, and the debt at June 2023 was Sh10.25 trillion; that is a net increase of debt of more than Sh1.5 trillion. In actual sense, we have borrowed more under Ruto in one year than the Kenyatta administration did,’’ Dr. Muinde says.

Dr Muinde faults the government for overspending and Parliament for failing to hold the Executive accountable for its spending habits.

‘’When you talk about the expenditures and spending beyond the budget thresholds, who is leading? It is Parliament; it leads in foreign and domestic travel – and these are the people who are supposed to hold the government to account,’’ Dr Muinde argues.

Kenya’s debt crisis is a complex challenge with far-reaching implications, and navigating the murky waters of mounting debt obligations will require careful economic planning, robust fiscal policies, and prudent financial management.