Kenya speeding towards big financial crisis, agency warns

Government is borrowing more to plug budget gaps

Global ratings agency Moody’s has warned that if Kenya does not reverse its increasing debt, then it might get into a financial crisis.

The agency said it was particularly concerned about payment of interest which has been consuming a lot of tax revenue over the past five years.

Failure by the government to tame the country’s debt appetite, it said, will make it difficult for the country to absorb shocks that result from shifts in confidence by private lenders.

“If the government is unable to reverse the increase in debt we forecast over the next year and restore its fiscal strength, the sovereign’s vulnerability to shifts in private creditor sentiment could intensify and its capacity to absorb future shocks will be diminished,” said Moody’s.

The agency said, for instance, that the stock of short-term government debt — Treasury Bills — remained large at 8.7 per cent of gross domestic product (GDP) at the end of June 2020, “which leaves the sovereign vulnerable to market sentiment and a rise in its borrowing costs.”

It wants the government to implement a credible fiscal consolidation plan that will determine its ability to contain any rise in borrowing costs and liquidity or rollover risk.

Fiscal consolidation involves implementing policies to reduce budget deficits and accumulation of debt stock. This is achieved by either increasing the revenues or reducing expenditure to narrow the budget deficit.

“Part of the lower income tax revenue could be offset by the removal of tax exemptions and waivers,” said Moody’s, with several measures already included in the Finance Act.

Some of the measures include removal of some items from the zero-rated category of value-added tax and amendments to the excise duty on certain items.

“Over time, the elimination of additional tax waivers and exemptions could offset the tax cuts. However, we expect the majority of fiscal consolidation to come from lower spending,” said Moody’s.

For the 2020-21 financial year, the government reduced its revenue target by Sh110 billion.

However, rather than reduce expenditure due to the revenue shortfall, it decided to borrow more.

This comes at a time when the National Treasury has indicated that it plans to borrow Sh1 trillion, excluding grants from donors, which will push the country’s debt stock to Sh7.7 trillion.

Treasury said in the Budget Review Outlook Paper 2020 that before Covid-19 started wreaking havoc around the world, it had embarked on belt-tightening measures and was targeting a lower fiscal deficit.

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

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

“The pandemic did not only worsen revenue performance in 2019-20 financial year, but will also affect revenue performance,” Treasury said.