Inside Ruto's Sh1.25 trillion debt repayment headache from July

President William Ruto (right) with his deputy President Rigathi Gachagua during a past event. [Silas Otieno, Standard]

The government will confront a Sh1.25 trillion debt repayment headache from July 1 in a move expected to pile pressure on the Kenya Revenue Authority (KRA) to raise the funds for clearing the sovereign loans.

Significant public debt repayment in the current financial year that ends in June of up to Sh930.4 billion has already exposed public coffers to debt distress and triggered unprecedented jitters of default risks.

It means the debt repayment load will in the next financial year starting in July this year jump by a third or Sh320.3 billion setting up the cash-strapped Treasury for the additional strain.

"In the financial year 2023/2024 the revenue collection for the payment of public debt-related costs is expected to increase from Sh930.4 billion allocated in the financial year 2022/2023 to Sh1.250 trillion," states the Division of Revenue Bill 2023.

"These comprise the annual debt redemption cost as well as the interest payment for both domestic and external debt."

This makes it the highest repayment above the Sh1.17 trillion repaid in financial 2021/2022.

Debt repayment in the current financial year has exposed Kenya to higher interest rates at a time the global credit market conditions have tightened, limiting the country's borrowing window as the shilling has depreciated against the dollar and major currencies.

KRA is expected to collect Sh2.57 trillion in the 2023-2024 financial year, 17 per cent more than the Sh2.1 trillion it is projected to collect over the current financial year.

It remains to be seen whether the KRA will hit the target of the current financial year amid massive revenue declines.

Out of the total projected target for the next financial year, the national government is allocated Sh2.1 trillion meaning it will be left with about Sh927 billion to fund government programmes.

Debt repayment in the current financial year has exposed Kenya to higher interest rates. [iStockphoto]

This will squeeze crucial programmes such as health and education or building new roads and further stall the recovery of the battered economy and jobs.

Even then a gruelling task to raise massive revenues by KRA will be expected in the face of a slowing economy.

The World Bank for instance projects Kenya's economy will expand at 5.2 per cent and 5.3 per cent in 2024 and 2025 respectively.

To avoid a financial crisis the government could, therefore, resort to slapping Kenyans, who are already reeling from the high cost of living, with more taxes or it could go for more borrowing amid recent signs of debt distress.

Another option would be to induce massive austerity through deep cuts on State programmes which would further constrain the economy.

Treasury is trying to balance its debt portfolio - which is fast approaching the allowed Sh10 trillion limit - with expensive commercial debts now taking up more than 60 per cent of tax revenues.

Central Bank of Kenya provisional data shows that Kenya's debt stands at Sh9.18 trillion as at January this year, edging toward the Sh10 trillion borrowing cap set by Parliament last June.

President William Ruto is banking on a host of new systems and radical changes at KRA to help achieve the targets and bring more Kenyans into the tax bracket.

During last year's Taxpayers Day, which is organised by KRA annually, Ruto said it is possible to increase tax revenues by 100 per cent over the next five years as tax collections remain far below their potential.

However, experts have cautioned that raising taxes might not have the intended impact of increasing revenues and that the government should instead focus on growing the tax base.

For example, they say, government should consider reducing taxes to boost businesses and the spending power of Kenyans.