Kenya currently spends more than half its tax earnings paying off debt

Suspended Treasury CS Henry Rotich.

When President Uhuru Kenyatta appointed Henry Rotich to the plum position of Cabinet Secretary for National Treasury and Planning, his father was elated.

He was confident that his son, an A-student of economics who graduated from the University of Nairobi with First Class Honours, had what it takes to be the custodian of the trillions of shillings taxpayers put in public coffers.

“Henry Rotich was not the type of student who sends letters home requesting extra money for his upkeep,” recalled Rotich Kimatui.

In an interview with The Standard in 2013, the elder Rotich said his son could account for every single cent given to him, and put some aside in savings.

Criminal charges

But six years later, Mr Rotich has found himself in a situation that challenges any memory of his frugal youth.

Along with his former Principal Secretary Kamau Thugge, Rotich faces multiple criminal charges, including abuse of office, conspiracy to commit economic crimes, single-sourcing for projects, and approving payments contrary to the law.

It turns out that contrary to his father’s opinion, Rotich was a poor custodian of public finances, at least according to the Director of Public Prosecutions (DPP). The former CS is among 10 officials the DPP said flouted procurement rules and abused their oath of office by defrauding the State.

Rotich the student may have known the importance of living within his means, but Rotich the Finance minister was never satisfied with what the country generated. He ravenously borrowed to fill a bottomless spending hole that has seen the country’s debt rise to more than Sh6 trillion.

As a result, his critics speak of him as Kenya’s most profligate Finance minister a condemnation that is open to argument.

They also blame his version of economics for the country’s current woes where, despite year-on-year growth in the value of what Kenya produces, the benefits of this increase in gross domestic product (GDP) have failed to trickle down to the ordinary citizen.

However, Jibran Qureishi, Stanbic Bank’s East Africa economist, says this situation is neither new nor unique to Kenya.

In five years, Rotich had borrowed upwards of Sh3 trillion, an amount higher than what his 14 predecessors combined borrowed. And as of last year, repaying this ever-increasing debt was gobbling up about 57 per cent of tax revenue.

The country has low sources of revenue and high spending on non-development projects, a recipe for financial disaster.

Cash crunch

Additionally, the country is facing a cash crunch, which has led to aggressive tax collection that has run some companies out of business, while a host of others are fighting in courts to dispute abnormal tax bills slapped on them.

The Kenya Revenue Authority hopes to recover Sh15 billion, mostly through plea bargaining, where suspects agree to give money in exchange for amnesty.

This liquidity crisis has not spared the ordinary mwananchi. One in three Kenyans live below the poverty line, and the bulk of the country’s population of 47 million is struggling to make ends meet.

On the stock market front, the past three years have seen large decreases in prices, reflective of a tough business environment.

The Nairobi Securities Exchange (NSE) continues to experience a listing drought, while several businesses that went public either register losses or sharp profit drops.

The NSE 20-Share Index was at 2,733.5 on Friday. This benchmark index has gradually fallen from an all-time high of 6,161.46 in January 2007, under President Mwai Kibaki’s tenure.

And just this year alone, close to 20,000 people have been sacked in an economy where an average of one in 10 people hold salaried jobs.

However, under Rotich, foreign exchange reserve holdings performed positively, with the country holding enough dollars to cover import costs for six months. And the shilling has been largely stable.

But his successor at the Exchequer, Acting CS Ukur Yatani, is frantically trying to get rid of the larger fiscal mess Rotich made. Mr Yatani has made no secret of the fact that his biggest challenge currently is restructuring the country’s debt profile, including controversial loans like the Eurobond.

“We are planning to retire most of the commercial loans and replace them with concessional ones,” Yatani told The Standard in a past interview, but warned this would take some time.

Yatani comes across as an honest, sober and firm administrator. While it may be too early to celebrate, especially because he may still be auditioning for the job, the acting CS’ quest for fiscal hygiene has appeared unwavering. And he has been forthright about the situation Kenya finds itself in.

Unlike Rotich, who said the country was broke only to backtrack less than 24 hours later, Yatani has been steadfast in his convictions.

“If the debt is left as it is, we’re going to crash,” he told senators last month.

In an effort to stem the bleeding, ministries, departments and agencies (MDAs) are expected to cut back on extraneous spending, which will see officials lose most of their travel perks, per diems, newspaper subscriptions, advertising budgets and tea.

Yatani has also sought to inject some transparency in the manner in which the country’s debt is managed.

Already, the National Assembly has approved his proposal to amend the Public Finance and Management Act so that the country’s debt limit is not pegged to GDP, which he describes as a “moving target”.

Currently, the country’s stock of debt is not supposed to be more than 50 per cent of GDP in present value terms. But Rotich breached this when he borrowed Sh770 billion in the last financial year.

Dismal science

They say economics is a dismal science, always getting its projections wrong, something Rotich could be said to have illustrated practically. Except in his first financial year, 2013-14, his spending has always been off tangent, forcing him to borrow more than he had budgeted for.

When he took office in 2013, Rotich noted that the fiscal deficit – the difference between what a country spends and what it collects in taxes –between the financial years of 2009-10 and 2011-12 was lower than what was budgeted. This was not good, he said.

“While this may indicate a somewhat strong fiscal position, it happened against a backdrop of lower execution of the Budget, which does not bode well for growth and poverty reduction,” Rotich said then.

He would soon push spending to new heights, with the peak seen in the 2016-17 financial year. The country’s fiscal deficit as a percentage of the size of the economy hit a high of 9.1 per cent.

Rotich had promised a fiscal deficit of 6 per cent of GDP, but that was an election year. It is a no-brainer that at such a time, the government needs to reduce its spending because this is when the private sector hibernates, reducing critical tax revenues.

But politicians desperate for re-election would not have this on their priority list; they go on a spending spree in their hunt for votes.

For instance, between June 2016 and June 2017, President Uhuru Kenyatta and Deputy President William Ruto’s domestic travel budget rose from an average of Sh500 million to Sh700 million.

The run-up to elections comes with other spending pressures. Teachers, doctors and other civil servants know this is the best time to agitate for higher pay.

Further, maize farmers, mostly well-connected politicians who had imported the grain, took this opportunity to push for better prices for their products.

Meanwhile, a crippling drought pushed the price of maize flour through the roof, making life hard for a majority of voters who survive on the critical staple.

Afraid that the clamour for an ‘Unga Revolution’ would be hijacked by the Opposition, Rotich hastily put together a shambolic subsidy programme, where he allowed the unfettered importation of duty-free maize from as far as Mexico.

Local farmers are still smarting from the effects of that decision to date.

Rotich watched as President Kenyatta kept throwing good money after bad. The President pumped a billion shillings into a sugar miller that needed more than Sh10 billion for its machines to start roaring.

It was bad economics overseen by a good economist – the move was akin to trying to resuscitate a patient in the Intensive Care Unit with a painkiller.

Thanks to election-related expenditure pressures, Rotich ended up borrowing Sh787.7 billion, much higher than the Sh528 billion that he had budgeted for in June 2016.

And even after public coffers ran dry, Rotich kept borrowing to meet Uhuru’s insatiable appetite for mega projects.

Rotich insists that he sunk most of the borrowed cash into capital-generating infrastructure projects, including highways, energy projects, ports and a modern railway.

But according to his critics, Rotichnomics – which is what the economic policies and ideology associated with the suspended CS have come to be called – has turned out to be voodoo economics.

Most governments and companies take loans for posterity. And Rotich insisted that, in the long run, debt-funded infrastructure projects would help the current generation’s children and grandchildren move around easily, enjoy uninterrupted electricity and Internet connectivity, and have better crop yields that they can get to market faster. Increased earnings, he added, would lessen the burden of debt repayments.

Cash-strapped taxpayers

However, rather than future generations reaping the benefits and bearing the cost of Rotich’s infrastructural projects, the current crop of cash-strapped taxpayers are the ones servicing most of these debts.

In the year to June 2019, for every Sh100 the country earned from taxes, non-tax revenues and grants from donors, Sh57 went into servicing debt. Six years ago, the Treasury paid out Sh25 from every Sh100 earned.

“This is money that would have gone into critical public services,” said Jeff Gable, head of research at Absa.

To make matters worse, some of the mega projects Kenyans are paying for, valued at more than Sh300 billion, have stalled. Two such projects, the Arror and Kimwarer dams, have come back to haunt Rotich.

So, while the economy continues to report growth in GDP, on the ground, things are different.

For instance, bad loans as a fraction of total loans have increased, hitting a high of 12 per cent. Businesses are reporting lay-offs, others are relocating over high production costs. As a result, income taxes as a fraction of GDP have reduced.

Credit to the private sector has grown the fastest at 6.3 per cent in August – but this pales in comparison to 25 per cent growth in 2012.

Maybe Rotich would have been as frugal and pragmatic as his father knew him to be when he was still in school if his employers, the President and his deputy, were more careful about how they spent tax shillings.

If that is the reason, then Rotich did not fail for lack of scruples, he failed for lack of guts; a yes-man who could not look straight into the king’s eyes and tell him he was naked.

When the king realised that one of his most trusted courtiers had been watching him walk around baring it all, he was furious. So when fate came calling, the king just watched his servant sink in ignominy.