Treasury eyes Sh1trn loan to climb out of Covid-19 debt hole

National Treasury CS Ukur Yatani.

Kenya plans to borrow a record Sh1 trillion between July and June next year to plug a budget hole that has been deepened by the negative impact of the Covid-19 pandemic.

This is more than three times the Sh326.2 billion that the Jubilee government borrowed in its first fiscal year of 2013/14, and is likely to push the country’s stock of debt to Sh7.7 trillion by end of June next year.

This is Sh1.3 trillion short of the Sh9 trillion legal ceiling. With this money, the Government can disburse a monthly stipend of Sh5,080 to 16.4 million poor Kenyans for a year, money that would be more than adequate for their dietary needs.

Indeed, such a stipend would be enough to pull up those in rural areas from the poverty hole as official figures show they only need Sh3,252 to escape destitution.

Of course, the government does not plan to use these loans as tokens to the poor. But it hopes that the borrowed cash will lift millions out of poverty by resuscitating businesses distressed by the Covid-19 pandemic and creating thousands of jobs.

The money that Treasury expects to borrow from both local and foreign investors in 12 months from July, technically known as fiscal deficit, had initially been estimated at Sh898 billion. The projected fiscal deficit, or budget hole, excludes grants from donors.

But in the draft Budget Review and Outlook Paper (BROP), 2020, this has been revised upwards due to the poor business environment that saw Kenya Revenue Authority (KRA) collect less taxes in the financial year 2019/20, particularly in the fourth quarter, stifled by the containment measures instituted by the State to curb the spread of the coronavirus disease.

The Exchequer thus revised downwards its earnings for the current financial year from Sh1.63 trillion announced in June by National Treasury CS Ukur Yatani in his budget speech, to Sh1.52 trillion.

Consequently, the fiscal deficit–the difference between the country’s total revenues and its total expenditure–as a percentage of the Gross Domestic Product (GDP) is expected to rise to 8.9 per cent in FY 2020/21, which is higher than the eight per cent registered in FY 2019/20.

The GDP is the sum of all goods and services produced in the country. The Treasury said in the outlook that before Covid-19 started wreaking havoc around the world, it had embarked on a journey of belt-tightening measures and was targeting a lower fiscal deficit of 6.3 per cent of GDP in FY 2019/20, 4.9 per cent of GDP in 2020/21 and, ultimately, 3 per cent of GDP over the medium term.

This austerity plan was premised on strong revenue growth, reduction of non-essential spending such as hospitality, tea, advertising and a “gradual slowdown in the growth of public debt”, the Treasury said.

“However, this path was interrupted by the outbreak and rapid spread of the Covid-19 pandemic,” said Treasury in the outlook, which sets the stage for the Government’s fiscal policies for the current financial year.

“The pandemic did not only worsen revenue performance in FY 2019/20, but will also affect revenue performance in FY 2020/21,” reads part of the BROP, 2020.

Taxes on imports were hit the hardest, affecting such tax heads as import duty, value added tax on imports, import declaration fees, and the railway development levy due to a decline in imports and reduction of trade among countries.

Treasury added that other domestic taxes such as excise, PAYE and corporate taxes have been severely affected by declining incomes and depressed consumption.

With reduced tax revenues, the government has been forced to go on a borrowing spree. When you include grants, the budget hole to be plugged with loans is expected to rise to Sh951 billion from the earlier estimate of Sh841 billion. This deficit will be plugged through both local and foreign borrowing of Sh554 billion and Sh397 billion, respectively.

Luckily for government, most of the loans it has so far received have been cheap with a long tenor and grace periods as well as low interest rates. The loans have mostly come from multilateral institutions such as the World Bank, International Monetary Fund and the African Development Bank.

Prior to Covid-19, the Government had been under pressure to reduce its debt appetite. Mr Yatani, who had just replaced Henry Rotich, had aggressively launched an austerity campaign aimed at reducing the country’s debt levels by discouraging non-essential spending and improving efficiency in revenue collection.

Yatani had also embarked on a mission to wean the country off expensive commercial loans, including sovereign bonds such as the Eurobonds, syndicated loans and supplier credits in a bid to give the country breathing space in the repayment marathon that denied funds to critical development expenditures.

But this was interrupted by the Covid-19 crisis that devastated the economy, with many businesses shutting down and thousands losing their livelihoods.

The Government was not only expected to address the health effects of the pandemic, which by yesterday had seen 35,969 infected with the disease and 619 dead, it also had to cushion households and businesses.

As a result, the government had to forego nearly Sh172 billion in tax reliefs. In addition to the Big Four agenda, the government also cobbled together an eight-point stimulus package worth Sh54 billion aimed at reviving small businesses.

This even as it received more money to spend on tracing, testing, isolating and treating those affected or infected by Covid-19.

With the government expected to do most of the heavy lifting in the country’s recovery efforts, even debt-shaming critics have given it the green-light to borrow.

In its latest report, the Parliamentary Budget Office noted that the negative effects of the coronavirus disease, including the magnitude of the economic stimulus package, made it difficult for Treasury to continue on its austerity path.

“Under these circumstances, it is difficult to implement fiscal consolidation measures.”

But the report also warned that the high fiscal deficit could be counterproductive should the negative effects of the pandemic persist.

“The prevailing high fiscal deficit implies that Kenya will have limited room for a fiscal response to the impact of the Covid-19 pandemic on poor and vulnerable households, especially if its economic shocks persist for an extended period,” said MPs. There have also been increased calls for the borrowed cash to be spent prudently. While noting that a break in the country’s fiscal austerity plan to accommodate Covid-19-related measures is appropriate, the IMF insisted that the “measures should be temporary and well-targeted.”

“Once the crisis abates, it is critical that the authorities resume their pursuit of a growth-friendly medium-term fiscal adjustment, including raising revenues as a share of GDP to reduce debt vulnerabilities.”