National Treasury CS John Mbadi is working under very precarious circumstances. As the CS burns his midnight oil to streamline Kenya’s fiscal landscape, it is must not be lost on him that any reference to the rejected Finance Bill 2025 might reignite the ire of the Gen-Zs who frustrated implementation of the earlier one that went to National Assembly in June.
Yet the country cannot afford to continue in a situation where more than 10 per cent of its national budget is financed from external sources. Such a situation not only erodes the country’s sovereignty and national pride, but also undermines development, as a good chunk of the domestic revenue is used to repay debts.
Currently, Kenya uses more than Sh6 out of Sh10 of revenue to repay debts, leaving a paltry Sh4 or less for development and recurrent expenditure. This is unsustainable. No wonder the country is struggling to meet its domestic obligations.
The story is the same in many other sectors across the public service. This is shameful for the country. Sadly, this phenomenon of a cash-strapped economy did not start with the Ruto administration. Kenya has been tinkering on the verge of default on its international debt obligations for about a decade. This unfortunate situation was visited upon the country through fiscal indiscipline of the Uhuru Kenyatta administration.
The government maintained huge deficits in its budget cycles in order to finance the ambitious infrastructure development projects. At the same time, up to 30 per cent of the budget was lost due to malfeasance, according to Uhuru, who lamented that corrupt public officials gobbled up at least Sh2 billion per day in underhand dealings. Budgeted corruption during the Uhuru regime was therefore, responsible for increasing the budget deficits that returned the country into the stranglehold of the World Bank and IMF.
Before that, President Mwai Kibaki had skilfully navigated the Kenyan fiscal ship, and at one point managed to underwrite up to 95 per cent of the National Budget using domestically mobilized resources. Kibaki’s legacy of prudent fiscal management was quickly blown up by Uhuru’s regime through a combination of raw appetite for cash and ineptitude. We have it on the authority of the Auditor General that up to Sh1.13 trillion of foreign loans could not be traced to the Kenyan economy.
In other words, at the time of the audit, the National Treasury could not confirm to the Auditor General if the money ever got into the economy, and if it did, what exactly it was utilized for. In a nutshell, the near-debt distress situation in Kenya is self-inflicted. The situation was not made any better by the convoluted manner in which the offshore loan portfolio book was managed.
The Auditor General has on numerous occasions reported the reluctance of National Treasury officials to avail Kenya’s loan portfolio book for inspection, thus raising a huge cloud as to whether taxpayers have been repaying odious debts that have gone into government officials’ pockets.
The officials prioritize fictitious loans from which they extract private benefits under the guise of repaying offshore loans. The Ruto administration therefore, took over an economy that was significantly suffocated of cash and development by the previous regime which the Auditor General reports paint as rapacious and corrupt. By December 2023, the Ruto regime realized that Sh10 trillion debt ceiling was too low for a country that was literally unable to deal with its pressing domestic revenue needs.
Thus, the National Assembly introduced a debt anchor at 55 per cent of the country’s GDP to enable the Treasury to access more money from offshore sources to keep the economy afloat. As at now, the country is still trying to find its fiscal bearing. It is refreshing, however, to note that the current administration has undertaken to audit the debt portfolio book with a view to establishing the exact amount that the country owes to domestic and offshore lenders. Once the loan ledgers are cleaned up, the country will have a clearer view of how to manage its debt and budget deficits.
Unfortunately for Mbadi, he does not have the luxury of time. The CS took over the Treasury on the heels of the Gen-Z rejection of Finance Bill 2024 on account of increased taxation measures. The suspended Finance Bill 2024/2025 was considered insensitive given that the country was already reeling under the weight of a tax burden which had grossly eaten into the citizens’ purchasing power, and compromised their welfare.
Kenyans are, therefore, waiting with bated breath with the hope that the new taxation measures to be introduced by Mbadi will improve their lot. In there lies the catch 22 situation for the CS. The burgeoning offshore debt size is already threatening to push the country to the black book of debt defaulters. Offshore debt defaulting does degrade a country’s credit rating, and sends negative signals to the capital markets.
This complicates a country’s opportunities for future access to lowly priced loans. Kenya cannot afford to go the route of loan default at a time when revenue performance is not quite impressive, and the country might continue to seek external funding for budgetary support unless it drastically changes its fiscal course. The funding options that might be available for the country - if they will be available at all - are very expensive commercial and syndicated loans.
The Treasury CS has a lot of homework to do if he wants his budget proposals to sail through Parliament. First, there’s got to be elaborate public participation for citizen buy-in to create the requisite critical mass to legitimize the budget making processes. Once legitimacy is achieved, it will be difficult for late converts among the Gen-Zs to marshal adequate numbers to disrupt the process. Second, the Treasury must step down from the ivory tower, and reach out to the citizens, to tell them what the actual situation is, what is being done and the sacrifices they need to make in order to bring the economy back on track. That way, the government will create certainty and stability in the economy.
Equally, the CS should deal decisively with the evident fiscal irresponsibility, which is the biggest baggage that the current regime inherited from the previous one. Mbadi is not new to the phenomenon of budgeted corruption. As a matter of fact, as a legislator and chairperson of the National Assembly’s Public Accounts Committee, he was at the forefront of identifying many instances of odious debts and fictitious budget lines in several National Budgets. He now has an opportunity to seal the loopholes that he so adeptly identified as an opposition legislator.
Prof Ongore is a former Chief Manager at KRA and teaches at the Technical University of Kenya