Kenyans to spend sh870 billion on debt repayment in the 2018/2019 financial year, equivalent to 24 Thika Superhighways

The national budget for the 2018/2019 has recently been read and apart from its astronomical size, it provides a lot to chew on and think about; especially in regards to the debt implications on the lives of ordinary Kenyans.

The Treasury Cabinet Secretary Henry Rotich announced a sh3.074 trillion budget that will be spent across 5 areas, namely the national government ( sh1.6 trillion), consolidated fund service ( sh962 billion), county allocation (sh372 billion), parliament (sh42billion) and the judiciary sh17 billion.

The consolidated fund service (sh962 billion) consists of mandatory spending by the national government including payment of pensions, subscriptions to international organisations, payment of salaries to constitutional office holders etc.

Surprisingly, the amount allocated to the judiciary has been proposed for a sh2.5 billion slashing, this is despite the courts receiving the smallest allocation of all the other sectors, including parliament’s sh42 billion allocation.

National government’s budget expenditure

The national government will use 61.01% of its sh1.6 trillion budget allocation on recurrent expenses including sh416.86 billion on salaries, while- a paltry, slightly under a fourth of the amount will be used on development.

The development projects will include infrastructure expansion for manufacturing zones like the Dongo Kundu Special Economic Zone (SEZ). Leather industrial park and textile development which both received 400 million in allocations. Additionally, facilities at textile manufacturer RIVATEX and the New KCC will be modernised at a cost of sh1.4 billion and sh200 million respectively.

The department of infrastructure, transport and energy will receive sh112.99 billion, sh90.42 and sh59.89 billion respectively for development.

Huge public debt  

The International Monetary Fund recommends to countries a debt to GDP ratio of not more than half, Kenya’s public debt currently stands 6.2 percent above that mark. As such, under the current budget, a whooping sh870 billion shillings has been apportioned for debt repayment.  To get a sense of how large this allocation is; sh870 billion can construct 24 Thika superhighways at a cost of sh36 billion each. It can also construct two Standard Gauge Railways (SGR) from Mombasa to Nairobi with some change to spare.

Sh870 billion represents a compound growth of more than a quarter from our debt payments three years ago. Additionally, it takes the country’s debt-service to revenue ratio (a gauge of whether a country’s debt is healthy; healthy debt should be at about 30 percent debt-service to revenue) to 51.56 percent.

Furthermore, this figure could actually be higher than stated, putting into consideration that Kenya readjusted how it calculated it’s GDP in 2014, by changing the base year used for calculation to 2009 from 2001. This is known as rebasing and it boosted Kenya’s GDP in 2014 to sh4.76 trillion from 3.8 trillion in 2013-rebasing causes debt levels to fall as a portion of GDP.

Nonetheless, such a rebasing does not improve a country’s ability to repay debts, its income nor growth in export; thus the numbers may not really tell the full story.

Moreover, according to economist Mohammed Wehliye, if the value of the Kenyan shilling drops against the dollar, the cost of paying the debts rises. This eventually trickles down to the common mwananchi as banks will cut down on lending in adjustment to higher costs of credit which they won’t be able to pass on to consumers because the interest rates are capped.

Financing the budget

The Kenya Revenue Authority collected sh1.365 trillion in the 2016/2016 financial year falling short of its target by sh50 billion. For the 2017/2018, Treasury CS Henry Rotich said that Kenya Revenue Authority (KRA) had revenue shortfalls during the first half of the year, and had instituted initiatives to collect an additional sh74 billion by end of June. By April 2018, KRA had only collected sh33 billion but was expecting to get the remaining amount by end of June 2018, he added.

Treasury aims to finance the new 2018/2019 budget through a number of ways including sh1.74 trillion through ordinary revenue-which is majorly tax generated. For this to happen, Mr. Rotich has proposed the Income Tax Bill 2018 with initiatives to increase revenue.

The new bill will increase the income tax for people earning above sh9 million per year to 35 percent from 30 percent. Additionally, the bill seeks to increase corporate tax on companies whose annual taxable income exceeds sh500 million to 35 percent from 30 percent.

Treasury will also take a 15 percent of the single business permit fee issued by county government in addition to changing the status of some products; including food items like flour, from zero rate to exempt. This means the cost of these products will rise as manufacturers will have to pass down a 16 percent VAT charge to consumers.

However, even if this works, it still leaves close to half of the budget unfinanced, further plunging the country into debt to finance operations in the 2018/2019 financial year.




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