Every Kenyan in Sh63,500 debt as borrowing hurts economy

By JEVANS NYABIAGE

What Kenyans are known for istheir insatiable appetite for credit.  Their love for spending is not debatable.  This explains why the Central Bank of Kenya data shows that in the nine months to September 2013, Kenyans borrowed a massive Sh389.3 billion for personal or household use.

This is more than a quarter of total loans, which stood at Sh1.52 trillion as at September 2013.

Indeed, this compares poorly with the cash borrowed to invest in productive sectors such as agriculture and manufacturing that could boost the economy currently struggling for take off. The problem is that most personal loans are spent on consumables, luxuries and on acquiring depreciating assets, such as cars.

But despite the risks, over the past five years, the uptake of personal loans has more than doubled.  In Kenya, we learn to consume, and squander money before we earn it. Whereas the economy’s overall health is reflected by the productivity at the personal level, individuals’ poor saving and spending culture means the economy will still struggle to rebound.

Indeed, attaining a growth rate of 10 per cent and sustaining it as envisioned in the government’s long term development blueprint Vision 2030 remains a pipe dream. Kenya’s saving rate of around 13 per cent of gross domestic product (GDP) is lower than the global 26 per cent average for low-income countries. This consumer culture could be getting people into serious debt. Recent data from Consumer Insight indicates that Kenyan teenagers and young adults are spending more than Sh252 billion annually. 

But for most Kenyans, they don’t like this sort of conversation on spending within their means, borrowing wisely and investing prudently.  Though that is on an individual level, the same is happening on the national level.

The country is borrowing billions of shillings to fund operations with three quarters of the budget going to recurrent spending. Analysts say debt is not bad, but it depends on what the loan is used for.

The state of Kenya’s finances is debated emotionally, rather than rationally and on substantive figures and policy direction. This is mainly because politicians often lead the discussion on pay raises, wage cuts, development projects and taxation. Last week’s visit by the Chinese Premier Li Keqiang is expected to open up the debate on Kenya’s worsening debt situation. According to agreements signed last week, China is lending Kenya a total of Sh340 billion, which would be used to build the Mombasa-Nairobi Standard Gauge Railway (SGR) line. 

With more than half of this loan being a commercial loan, the country’s level of indebtedness is indeed worrying. Kenya’s public debt will jump to Sh2.54 trillion. This is even before we add the $2 billion (Sh174 billion) that the Government wants to raise through Eurobond.

The matter could worsen with the National Treasury Cabinet Secretary Henry Rotich revealing that he intends to borrow Sh190.8 billion from the domestic market and a further Sh149.8 billion from external financiers to bridge a Sh342.6 billion budget deficit in the next financial year (2014/2015).

Although Treasury mandarins have put on a brave face that the current debt levels are manageable and sustainable, economists warn the country could be slowly creeping into a debt trap.

At Sh2.54 trillion, Kenya’s public debt is double what Treasury has budgeted to spend to run the national government in the financial year starting this July 1.  With this, each Kenyan owes foreign and domestic creditors more than Sh63,500, which is more than the take-home of many workers.   And since nearly half of the Kenyan population is jobless, a small number of working class or those in business are left with a heavy burden of servicing the loans.  It is a worrisome situation, because it means Kenya has reached a level where it spends more on servicing debt than on budgetary allocations.

The money the State  spends yearly on repaying loans increased from Sh49.5 billion in June 2004 to Sh137.6 billion in June last year.  This is turning out to be a debt crisis in the making. The amount of cash the country has borrowed will reach Sh2.2 trillion by June 2014, according to the National Treasury.

This means that at this level, Kenya’s debt to GDP level will be about 54 per cent. This comparison of debt to GDP is important as it compares what Kenya owes to what it produces. Analysts use this ratio to measure the ability a country has to pay back the money it has borrowed. 

This is quite similar to how a bank evaluates an individual’s ability make his or her monthly loan repayments based on the salary. The rule is that monthly loan repayments should not exceed a third of one’s net income. Kenya has a self-imposed debt-to-GDP ratio target of 45 per cent, but trimming that ratio could prove difficult in the short term with the ongoing expansive borrowing plans.  Now, analysts warn that the decision to sign Sh340 billion from a single source could later come to haunt the economy.  It is estimated that this loan alone is close to 10 per cent of Kenya’s GDP. 

With the current debt-to-GDP ratio expected to hit about 54 per cent in June, it means that with the Chinese loan, the ratio could jump to 64 per cent. This is even before we take care of the interest rates, which forms part of the country’s debt burden.

Rotich revealed that more than 50 per cent (Sh174 billion) of the Sh340 billion financing deal from the Chinese Government is a commercial loan. Rotich said the loan would attract an interest rate of 4.4 per cent per annum over a period of 12 years, with five years grace period.

Repayment period

The other component of the financing is a concessional loan, which carries a fixed interest rate of two per cent per year over a repayment period of 20 years, with a grace period of seven years. The new loan is likely to worsen the country’s external debt position currently estimated at Sh850 billion, according to data from the National Treasury. 

“In terms of exposure to a single project, there are definite risks. Are we paying back in dollars or in Chinese Yuan? Even if we are paying back in Yuan, it means we have to earn foreign currency before we can then buy Yuan to repay the loan. There are exchange risks,” Kwame Owino, the chief executive officer of Institute of Economic Affairs, told Weekend Business.

Owino said the 4.4 per cent interest rate applied to half of the loan is quite high compared to what Kenya could have received as a low-income country from other alternative sources.  However, he said two per cent for concessional is within the range of what the low-income countries get.  “Debt is not bad. The problem is that we are borrowing so much for a single project and from a single source plus the terms of it which are more stringent than what we could have gotten from other financiers,” Owino said.

 Already this year alone, under the consolidated fund services, debt is one of the things that the government has to pay first, which is close to Sh300 billion. Matters are going to get worse in March 2015 when nearly Sh500 billion of the domestic debt matures. It is expected that 40 per cent of Kenya’s domestic debt, which currently stands at Sh1.2 trillion, will mature in February 2015. This works out to about Sh449.63 billion, with an additional Sh45 billion in interest. About 26 per cent of this domestic debt is held in Treasury Bills (Sh316.25 billion), with 14 per cent being in Treasury Bonds (Sh133.38 billion). Owino says if 40 per cent of our domestic debt becomes payable next year, two things are likely to happen; first, the Government will likely compress discretionary spending to pay debt.

Secondly, the Government might decide to pay a portion of the debt and then rollover the rest. “This means our debt problem will still persist since we are rolling over debt plus the interest,” he added. According to Robert Shaw, an independent economist based in Nairobi, servicing of the country’s public debt has reached a difficult level. “What I think is that our debt servicing level has gotten to a level where it is uncomfortably difficult,” said Shaw. “A large chunk of our domestic debt will have to be repaid during 2015 making overall indebtedness worse.

 This is why we have to be more careful not to increase borrowing at a rate that is higher than our ability to repay.” The concerns could not have come at a worse time as Kenya is about to issue a sovereign bond to raise Sh172 billion ($2 billion) from international lenders. But borrowing in dollars, like the country would with the bond, poses a risk because the loan has to be repaid in dollars, yet Government revenues are in shillings. If the shilling weakens further from the current Sh87 to the dollar and heads to Sh90 as estimated by some analysts, the country would have to work hard extra hard to repay the debt.

Struggling sectors

Kenya would have to rely on foreign-exchange earners like tourism, coffee, tea and horticulture. But then these sectors are currently struggling. The exact date the sovereign bond will be issued has been a moving target. Initially, it was supposed to go ahead late last year. Then it was pushed to the first quarter of 2014. Now, the date is in limbo. Last week, the State rescheduled a $600 million (Sh52.2 billion) syndicated loan. Part of the proceeds from the debut $2 billion (Sh174 billion) Eurobond were to be used to retire the syndicated loan.

Treasury received a three-month extension on the commercial debt after the Eurobond was delayed. “What we have done is just to extend the repayment by another three months as we continue discussions on the sovereign bond,” Kamau Thugge, the National Treasury’s principal secretary, said. Kenya took out the two-year loan at an interest rate of seven per cent in 2012 to fund development. Underwritten by Citigroup, Standard Chartered Bank (UK) and Standard Bank of South Africa, the loan was due for full repayment on May 16.

Economists however, said the request for the extension of the repayment period is a signal of an economy that is under financial duress. “This means the Government is totally broke. The Government has overstretched itself in terms of expenditure. We are running a shortfall in revenue collections and there is no money in circulation. All these are signals that our economy is in bad shape,” said Samuel Nyandemo, senior lecturer at the University of Nairobi’s School of Economics.

According to Dr Nyandemo, rescheduling the loan repayments comes with penalties, which would make the loan even more expensive, coupled with the weakening of the local currency against international currencies. According to Dr Thomas Kibua, a former long serving deputy governor of the Central Bank, the financial position of the Government is not in good health.

“I think the crude word is you (Government) are running broke. Your programming is not right and something is not right,” said Dr Kibua who is currently a senior Economist at the African Development and Economic Consultants.

“Our national debt has become an issue. They want to buy more time to repay this loan which is not a good thing because the Shilling is slightly depreciating against the international currencies,” he added. Kenya’s first dollar bond worth up to $2 billion (Sh174 billion), part of which would retire the loan, was delayed again last month by a political row over payment of debts to two international firms related to Anglo leasing.

However, on Friday, President Uhuru Kenyatta directed Treasury to pay Sh1.4 billion to the two foreign firms, adding that it will enable the Government  float the bond in June 2014.