Worry as interest payments on China debt rise to Sh28 billion

Kenya’s interest payments to China have increased fivefold in the current financial year, painting a worrying trend of the country’s debt sustainability levels.

Data from National Treasury indicates that the country has so far made debt repayments to the tune of Sh28 billion to China in the 2018/2019 financial year that closes on June 30, up from Sh5 billion in the 2017/2018 financial year.

Of this, Sh24 billion went to settling interest on loans owed to the Asian country alone.

In total, Kenya forked out Sh81 billion in interest payments to its external creditors last year, with China’s allocation representing more than a third of this and only second to the Sh45 billion paid out in commercial debt.

This is a worrying trend considering that the country’s revenue growth has stagnated, forcing the Government to burden taxpayers with more levies to meet its mounting debt obligation.

Treasury Cabinet Secretary Henry Rotich has, however, painted a rosy picture of the country’s debt position, insisting that the Government’s fiscal strategy remains prudent.

“Kenya continues to meet its debt service obligations promptly with no accumulation of debt arrears,” said Rotich in his 2019/2020 budget speech in Parliament last week.

“Public debt is within sustainable levels and the debt burden is projected to decline over the medium-term as we implement a fiscal consolidation plan.”

However, recent expenditure patterns indicate Rotich’s assurances should be taken with a pinch of salt.

Last week, Parliament passed the second supplementary budget for the 2018/2019 financial year with an additional sh80 billion in allocations that will largely go towards recurrent expenditure.

This comes just days after Treasury borrowed Sh75 billion from the World Bank for budgetary support, which will cause more financial distress if the funds are once again deployed to recurrent expenditure.

Currently, revenue as a percentage of GDP remains stagnant at 18.3 per cent even as Treasury projects Kenya Revenue Authority’s revenue targets to hit Sh3 trillion in the next three years.

The taxman has, however, been unable to expand the revenue base fast enough to increase collections largely due to challenges in tax administration and the informality of the country’s economy.

This has pushed the Government to the domestic market for cheap credit, precipitating a credit crunch in the private sector and the Small and Medium Enterprises as commercial banks shy away from the “risky borrowers”.