Debt Sustainability & Economic Development

Defined by (Economic Times – Debt Financing, 2019) Debt means the amount of money which needs to be repaid back and financing means providing funds to be used in business activities of a Government or Company. An important feature in debt financing is the fact that you are not losing ownership in the Organization. Debt financing is a time-bound activity where the borrower needs to repay the loan along with interest at the end of the agreed period. The payments could be made monthly, half yearly, or towards the end of the loan tenure. Contrary to the opinion that debt is a bad burden, debt is actually good and necessary for progressive development. Prudent debt management by people of integrity can help the country reduce its borrowing costs, contain financial risks, develop domestic debt market and strengthen financial systems, and maintain financial stability.

State of Kenyan Economy

What is the real state of the Kenyan Economy? Every year the government prepares a budget detailing the projected revenues and revenue raising measures. In the recent years, the Kenyan budget has continued to be ambitious however it cannot be a true measure of the country’s economy. This has been attributed to the failure of meeting revenue targets hence the need to borrow to enable the country to meet its obligations. This debt has been rising over the years and the question is will it be sustainable?

The purpose of this article is to discuss and reflect on whether Kenya’s National debt is bearable and whether the country has still has a budget capacity gap. Public debt allows the country to finance capital and development projects which can help her to build its production capacity and facilitate improved economic growth. However excessive debt generates severe debt service obligations and can constraint economic growth; and become a burden to future generations (Chiang and Moss, 2000 and Malik, 2003). The debt burden becomes even more serious when the recipient country is not recording proportionate economic growth that would probably be used to repay the debt in future.

Increased and unsustainable debt has been a problem in many countries in the Sub-Saharan Africa and the Latin Americas. This prompted the international community to come in the rescue of these highly indebted countries through the Highly Indebted Poor Countries (HIPC) Initiative to save the countries from a total economic collapse. It is important to note that debt is not necessarily bad. The Kenyan constitution outlines that one of the sources of government revenue is loans, both domestic and foreign/external loans. The most important discussion is how much debt is taken and to what use is it spent. Unfortunately, most of the discussions and debates have been subject to controversy especially in the political space. Most developing countries have continued to borrow both internally and externally even before assessing their ability to repay in light of the poor performance of their economies. Kenya’s debt portfolio, just like is the case for many developing countries, has increased over decades but there has been so much debates and controversies in terms of the performance of the economy in terms of GDP growth. These concerns arise when we consider the revenue generation trends over the years which indicate a widening gap between debt accumulation and revenue generation based on a Budget Management Brief- 2018 presented by Institute of certified Public Accountants (ICPAK). The ability to generate and grow tax revenue is a strong indicator for future ability to repay loans. The table below compares revenue generation vis-à-vis deficit in budget implementation over the years.

Revenue Table

In order to effectively execute the budgetary functions of the government, the deficit is plugged in by borrowing to finance the projects that would otherwise not be implemented for lack of funds. The huge infrastructural project like Standard Gauge Railway takes a huge chunk of the revenue.

Table: Kenya’s Public Debt Status

The bulk of Kenya’s foreign debt carries concessional terms. However, the recent commercial borrowings entails huge repayment needs of syndicated loan and sovereign bond issuance. This brings us to the question, is Kenya’s Debt Burden Sustainable? The good news is that IMF estimated the size of Kenya’s economy to reach 10.1 trillion marks in the year 2019, with the Gross Domestic Product (GDP) estimated to rise by 1.1 trillion from Ksh. 9 Trillion in 2018 (Business Daily, IMF tips Kenya economy to hit Sh10trn this year Monday, April 15, 2019- By Victor Juma). If IMF prediction is something to go by, then Kenya’s economy is on a path of growth to a larger economy, with strong growth expected in the coming years, with better prospects for job creation, investment opportunities and improved delivery of social services.  The Debt, corporate or National, is never a threat as long as it is properly and prudently managed by putting it into use in the productive sectors of the economy and entrusting management responsibilities only to people of impeccable integrity.

Published on its official website, the National Treasury has in place the Medium Term Debt Management Strategy (MTDS). The 2018/19 MTDS is prepared taking into account the terms of any anticipated borrowing, the type of borrowing and the attendant risks or shocks that may impact on the government’s ability to meet its debt obligations, taking into account global and domestic economic and financial developments. However, The MTDS was prepared with recognition of the fact that Kenya was recently categorized as a lower middle income country with hardened borrowing terms and less concessional borrowing. In this regard, the country has made deliberate efforts to diversify its sources of external borrowing by accessing International Bond and syndicated loans market. However, there have been debates on the need to change the debt management strategies since they are increasingly misaligned with actual public debt portfolio outcomes.

There have been three core risks currently grappling the dept portfolio; First, is The cost (escalation) risks: The cost of servicing outstanding public debt had been gradually rising, to an extent that interest payments as a share of government’s total revenues has sharply risen to 27 percent in 2018, from 16 percent as at end of fiscal year 2015/16.  Second is The Refinancing risk largely associated with high domestic debt repayments falling, In 2014, the average time to maturity (ATM) of outstanding public debt portfolio stood at 8.4 years where as in 2018, It narrowed to 7.4 years. Third is, The Foreign Exchange (FX) risks, half of outstanding public debt is in foreign currencies and have to be repaid in such currency. A sound debt management strategy must robustly address these three risks. Fiscal activities during the period should be aligned with the pre-set targets, which could present an optimal execution path.

In the Treasury Eurobond Press Release of 15^th May 2019, The Cabinet Secretary, Treasury stated that recently, The Government of Kenya, acting through the National Treasury and Planning, successfully priced a new US dollar 2.1 billion, dual-tranche Eurobond of 7-year and 12-year tenors on 15th May 2019 in London, United Kingdom. The announcement of Kenya issuance triggered an overwhelming response from investors that amounted to an order book of US$ 9.5 billion, an oversubscription of 4.5 times. This was distributed as follows: US$ 4.0 billion in the 7-year tenor and US$ 5.5 billion in the 12-year tenor. This is the third time Kenya has been in the International Debt Capital Markets. The first was in June 2014, when it launched the debut bond of US dollar 2.0 billion and tapped for a further US dollar 750 million, while the second was in February 2018 when a dual-tranche of US$ 2.0 billion was issued (10-year tenor of US$ 1.0 billion and 30-year tenor of US$ 1.0 billion).Taken against the statement about the debt situation in the country, the question is whether this increase in debt is sustainable into the future. If the analysis reveals that we are facing uncertainties over what to do in present difficult situations, it may be time to make hard decisions and make use of stimulus packages to sustain the growth of the economy.

To avoid sliding towards a crisis, strong measures must be put in place to address the financial challenges facing the country. More growth- supportive reforms will be needed. As the government increases its debt portfolio, it is important to review existing fiscal policies, structures and investment frameworks that will provide an output of sustained growth, since accelerated investments can sustain the growth. The private sector will increasingly have to do some of the heavy lifting as well, as they take on projects aligned to the Government’s development priorities on the ‘Big Four’ Spending initiatives. To this end, the loan rate cap – which has inhibited private-sector lending and capital formation, will have to be addressed.

The Cabinet Secretary/ National Treasury and Planning will soon read the Budget in the House. This must be a time of reflection on Kenya’s debt situation, Financial Health and State of the Economy. Through his Letter dated 15th May 2019, The Cabinet Secretary stated that investors were satisfied that the on-going implementation of the “Big Four” Plan would sustain and accelerate the current broad-based growth. They were particularly pleased that the funding of the “Big Four” Plan would come primarily from the private sector under the Public-Private-Partnership (PPP) framework, and not from additional government spending. With this information, it will be important to prudently spend additional government spending on viable projects that will create increased employment opportunities transform lives and facilitate shared wealth among Kenyans.

In conclusion, Debt is a growth facilitator. With a good business and in viable investment opportunities and projects, debt improves liquidity at the times of necessary needs and it provides a safe store of value when put to right use. It is recommended that one should go for a debt when the cost of debt is less than income generated.

Kenyan Economy, in the hands of men and women of reputable integrity, will always prosper. Do you agree?