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Kenya to spend 40pc of tax revenue on servicing public debt

Kenya’s annual debt repayment is set to hit Sh618.5 billion next year, which will see the Treasury spend an estimated Sh40 out of every Sh100 collected from taxpayers on servicing the ballooning loans.

The repayment bill represents a 38.5 per cent jump from Sh446.4 billion spent on public debt this year compared to a projected 12 per cent growth in tax collection, which is a key indicator of the country’s ability to repay. 

Figures contained in the Division of Revenue Bill show that the State will spend Sh172 billion more to service loans in the financial year beginning July 2017, exerting more pressure on taxpayers who will also finance the General Election.

The Jubilee government has accelerated borrowing in the past four years to build a modern railway, new roads and electricity plants, but the rate of tax collection has not matched new debt uptake.

“These (public debt costs) comprise of the annual debt redemption cost as well as interest payment for both domestic and external debt,” says the Treasury in the explanatory notes to the Bill.

The huge increase means that taxpayers will now have to dig deeper into their pockets in the coming years to pay for the growing debt burden.

The debt repayment will constitute 40 per cent of the projected Sh1.5 trillion tax collection compared to this year’s 32 per cent.

The debt repayment load is double what is being spent to build the standard gauge railway (SGR) from Nairobi to Mombasa. It can also fully fund county governments for two years.

The amount is 11 times bigger than what the government spent on roads last year.

It almost matches the Sh673 billion that the State is planning to spend on development projects next year.

However, the government has barely exhausted 75 per cent of its development budget in recent years and if the trend continues, debt servicing will dwarf the entire amount poured into roads, rail, dams, power, ICT and other infrastructure.

Biggest budget item

Debt repayment remains the Treasury’s biggest budget item compared to essential expenditure lines like education and health.

Next year’s repayment amount is more than double the Sh282 billion that the State spent in the year to June 2013, indicative of the heavy loans uptake under the Jubilee government.

The country’s overall public debt currently stands at Sh3.5 trillion, up from Sh2.1 trillion in November 2013 at the end of former president Mwai Kibaki’s administration.

The ballooning debt has raised concerns that the growing appetite for loans risks hurting the economy.

“Although public debt remains sustainable, margins for manoeuvre are rapidly narrowing,” the World Bank said in its latest economic update on Kenya.

READ: World Bank says Kenya’s debt racing to danger zone

The Treasury has said that Kenya is still able to pay its debts, arguing that the infrastructure investments made will generate enough economic growth and revenues.

READ: Kenyan economy to grow amid headwinds

But the World Bank has cast doubt on this argument, saying that despite the expensive investments, Kenya’s productivity is falling.

“Overall, productivity in Kenya is low and falling, which raises the question of whether Kenya is getting high enough returns on its very significant public investments,” says the bank.

Economists have also raised concern about the viability and cost of the debt-funded mega projects like the SGR and the Galana Kulalu irrigation scheme.

READ: Economists warn Treasury must start cutting expenditure

Despite debt repayment racing 38.5 per cent next year, revenue growth is projected at 12 per cent to Sh1.5 trillion. This mismatch could exert pressure on Kenya if the trend goes on for several years.

The Treasury plans to continue its borrowing spree with a number of new loans lined up next year.

These include a Sh148 billion loan from China Exim Bank for the Nairobi-Naivasha SGR leg, Sh50 billion World Bank loan for the Isiolo-Mandera Road and Sh50 billion for the Kibwezi-Isiolo Road.

“We are repaying others (loans) and as long as our economy is growing, then our (debt) thresholds with respect to the size of the economy is what we look for,” Treasury secretary Henry Rotich said on Monday.

“We have projected the economy and seen how our growth is going to be especially if we maintain the momentum we have now. That should give us the space (for debt uptake) going forward.”

Kenya has also been flirting with the idea of floating another Eurobond but is yet to indicate if it will proceed with it. The International Monetary Fund (IMF) has warned that a Eurobond is comparatively expensive and should be financing of last resort.

Renaissance Capital senior economist Yvonne Mhango recently said that if Kenya took up a Eurobond it should be limited to below $1 billion (Sh100 billion) as part of a wider slowdown in debt accumulation to avoid going into debt distress.

Next year’s 38 per cent jump in loan repayment will come a year before the first tranche of the June 2014 Eurobond proceeds becomes due.

The five-year $500 million (Sh50 billion) Eurobond will fall due in 2019, meaning that debt repayment figures are likely to continue going up.

Other loan repayments like the amounts spent for the Nairobi-Mombasa SGR will become due in 2023 while the 10-year Sh150 billion Eurobond will have to be repaid in 2024.

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