The future of Public Debts in Kenya in relation to MSMEs
Amani National Congress (ANC) party leader has described the Kenyan Economy with one key word; ‘Broke’. This rings eloquently to the ears of every Kenyan Micro, small and medium sized enterprise (MSME) owner. Even with the intervention of the International Monetary Fund (IMF), our country has failed to contain the ballooning public debts. MSMEs have been left in despair with the weary new tax regulations imposed by the National treasury. What does the future hold for such battered economy? Is it time that our country is headed for a reckoning?
In a statement by the National treasury boss Ukur Yatani during the presentation of budget estimates for the fiscal year 2021/22 in June, noted that, personally he will initiate the collection of public debt from Kenyans to fill the ceiling.
“I’ll soon be knocking on your doors to raise debt ceiling,” Yatani told members of parliament.
Public debts have been blossoming with every year that the budget is read. According to the 2021 Budget Policy Statement, Kenya’s public debt as of June 2020 stood at Sh7.06 trillion, which is equivalent to 65 percent of GDP.
As of June after the budget reading the public debt shot to 71.5 percent, quite the highest since. The trend has been rising exorbitantly in the last few years. In the first decade of the 21st century, world public finances were enjoying. Budget deficits were minor, public debt was under control, and rapid economic growth amid the internet revolution and soaring commodity prices offset high nominal interest rates.
MSMEs were lying on the comfort trying to efficiently sprout without any shrinkage induced by the economy. With just two decades later, two major economic depressions hitting the Kenyan economy – the great economic depression of 2007/2008 and the Covid-19 pandemic have left many businesses feeble of choice and in short of performance.
A record seven emerging world markets defaulted on their debt obligations last year, with more likely to follow in 2021. Economists have warn, on chances of great recessions to follow in case the country continues to borrow in the name of funding the set projects. MSMEs have been on riot over the new tax regulations, since it has denied them the chance to be independent in enjoying the proceeds of the economy.
To the end of last year and early this year, there was a lot of political movements, a trauma that was later given to MSMEs by a number of lockdowns in the hot economic zones of Nairobi and its neighboring counties. But with the political and economic scars still fresh from austerity in the wake of the Great Recession, few county governments appear in a hurry to withdraw current fiscal benefits.
Their stance is facilitated by today’s low yields, which make interest payments less burdensome than in the past. What is more, in an age of strained public services and rising inequality, higher debt-financed government spending is seen by many as not just tolerable, but advisable.
CS Yatani has been quoted not once, saying the public debt is quite manageable and the effect of ‘manageable’ term is impacted on the MSMEs.
Despite the fact that he highlighted on the June estimates that the total public debt requirement for the FY’2021/22 is set to reduce by 4.2% to Kshs 929.7 billion, from Kshs 970.9 billion, in FY’2020/21, as per the revised budget. The public debt mix was projected to comprise of 29.2% foreign debt and 70.8% domestic debt, from 44.0% foreign and 56.0% domestic as per the FY’2020/21 budget.
The rise in debt servicing expenses may be partly attributable to the Debt Service Suspension (DSSI) agreement that Kenya entered into which temporarily suspended debt servicing costs, totaling Kshs 32.9 billion, in the last half of FY’2020/21.
The increase in domestic debt mix to 70.8% from 56.0%, may lead to slow growth in the MSME lending as banks end up prefer lending in the government securities issued which are viewed to be low risk.
As such, the absolute level of public debt is likely a poor guide to debt sustainability: Rather, a country’s ability to pay back its debt is the key. In this sense, the debt position of Kenya still looks able to be maintained: The portion of government revenue assigned to servicing debt has actually tended to fall in recent years as interest rates have declined. Developed economies also have deep domestic capital markets and debt denominated in their own currencies, limiting the risk of default.
For instance in China in April had alerted Kenya on the moratorium they are subjected to in the previous agreement. The country was at risk of losing the port of Mombasa and some key public endowments in the payback of the defaulted loan. Key pull ups have been done since then, the latest being the Finance bill 2021, which has totally curtailed the growth of MSMEs.
Debt sustainability continues to be a key concern, with the country’s public debt–to-GDP ratio having increased considerably over the past five years to 69.6% as at December 2020, from 44.3% as at the end of 2013 with half of the debt being majorly external. The Paris club members in the last financial year 2020/21 awarded Kenya, a sum totaling Kshs 32.9 billion which is 0.9% of the Kshs 3,769.9 billion of total external debt as at December 2020. This elevated the risk of debt sustainability by the Treasury.
The debt suspension helped in providing the much-needed relief as it reduced pressure on payments falling due from 1st January 2021 to 30th June 2021, as well as, a five-year repayment period with a grace period of one year. The last year has seen a cascade of credit rating downgrades in the country, further increasing bond yields in a vicious feedback loop.
According to Statista – Economics, the national debt in relation to gross domestic product (GDP) from 2016 to 2026 will have a mirage balance between 71 per cent and 68 per cent for the years between 2021 and 2026. The one decade statistics was done in relation to the ongoing economic trends and the covid-19 pandemic. 2016 and 2020 experienced a moment of exponential rise of public debt from 58 per cent to 65 per cent, respectively.
As a the perfect way to go in the future of public debts in the country, embracing defaults are certainly the quickest route out of a debt crisis, and likely the most politically palatable, but they are not just silver spoon wins. There is an urgent need to restructure the debt mix where the government should go for more concessional borrowing to reduce the amounts paid in debt service.
Commercial borrowing should be limited to only developmental projects, with high financial and economic returns, to ensure that more expensive debt is invested in projects that yield more than the market rate charged such as the Nairobi Express way, Dongo Kundu and the newly refurbished port of Lamu.
Kenya’s debt problems have been more of a lack of fiscal discipline coupled with the inadequate political will to fight corruption so as to avoid pilferage. Most at times MSMEs have been found on the losing end as they suffer the scars created by the political sphere. The setting up of the Public Debt Management Authority (PDMA) – to monitor all public debt-related transactions, is a step in the right direction.
As the country gears into the next phase of election, a lot is expected in the already surging public debt. In the longer run, growing out of debt by boosting MSME productive capacities could be a key strategy—and would also have the happy side-effect of improving living standards in the process. However, this would necessitate undertaking reforms today with no short-term political payoff.
The Kenyan economy is at little imminent risk of default, but would be wise to avoid complacency. If monetary authorities (CBK, CMA, counties and Treasury) are forced to reduce their market activity in the face of intensifying price pressures, this could see artificially-depressed bond yields spike and debt interest payments gobble up a higher share of public spending. And even though as a last resort, the National treasury could always instruct the Central Bank to increase money in the economy so as to meet the overly burdensome domestic-currency debt obligations, this risks runaway inflation, elevating the performance of MSMEs.
As a nation we should fail to protect the economy. The alarm bells have already been ringing loudly for some time. MSMEs are on the run to salvage themselves out of the much heated Kenyan economy. As Mudavadi speaks of the economy, a lot has to be done.
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