Kenya’s debt portfolio in the 2022/23 fiscal year is over 70% of the GDP, eating into our national savings. It means that a good batch of what we earn as a country goes to servicing our debt. To make the matters worse, the 2022 and 2021 economic recession is still biting, which makes the government unable to meet its plans (budget). Nevertheless, there are other social projects that have to go on, irrespective of our financial position. Borrowing at the current market rate, which is approximately 12.75%, is not tenable since the KES 800 billion budgetary deficit attracts KES 100 billion in interest per fiscal year.
Concessional Loans
The proposal by the President to borrow at less than 10% per annum is not tenable in the current market. Banks depend on these savings and margins to grow their portfolio. Despite the government being the most secure borrower in the market, the opportunity cost for such investment does not breed regular income. His declaration meant that the Treasury CS Prof. Njuguna Ndungu should look for concessional loans from international development partners or deposit-taking state-owned enterprises.
With state-owned enterprises, their funding emanates from deposits from the working population and other socially inclined projects. That is where the savings culture comes in. The more you save towards your retirement or health insurance, the more money they get, which they can lend to the government for developmental purposes.
National Social Security Fund, National Hospital Insurance Fund and Housing Finance are some of the SOEs that are prime targets for concessional loans. However, such investment must go into revenue-generating projects that can enable the government to pay back.
The Road Towards Sustainable Savings and Borrowing
If the government borrows from its citizens, it can get as low as 9% interest. Using the capital to support businesses increases the tax base. Even if they cushion businesses with the extra 2-3%, the marginal benefit resulting from increasing the tax base makes the project worthwhile.
The struggle of formalizing businesses is creating a trackable formal sector, which can grow to support the economy in the long run. As for the informal sector, the government can use the available structures in the market. The overall goal in any economy is to increase savings and money supply, which can push the formal banking sector to create products around the same.
Japan is a classic example. With over 250% debt to GDP ratio, they can still manage their economy. Their debt is neither subjected to fluctuating money markets nor a balance of trade. However, Kenya’s approach will likely stretch its balance in the short run but grow in the mid-term and long term. It will significantly depend on the political leadership and monetary policy.
Short-Term Effect of the Directive
The government should shed off any developmental expenditure, especially ones that touch on new projects. It should also scale down public expenditure to basic sectors only. That is why the President asked parliament to scale down government expenditure by over KES 300 Billion when he made the first maiden addressed to parliament
Secondly, tax compliance will be a top priority. The government might apply an amnesty to defaulters, with moratoriums and interest cuts. The aim is to increase the exchequer revenues. Another possible tax avenue is the digital economy, which has grown to unprecedented heights in the last 5 years.
Thirdly, there will be increased activity around corruption. Persons of interest will be cornered to refund gains made from corruption proceeds.
If the government has to go into a large-scale development project, it can do so in a PPP (public-private partnership) arrangement. Government has natural resources like land, which they can offer.
All these, and other structural adjustment programs, will go a long way in liberalizing the economy. It will stimulate economic activity, leading to increased savings as a nation, which will grow money supply within the economy.
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