In fact, it was forecast that Kenya, alongside Zambia, Ghana, Mali, Ethiopia and Sudan were destined to default on their offshore loans by December of that year.
All, except Kenya, actually defaulted, suggesting that the East African giant crafted a viable public debt management strategy that rescued it from the verge of junk-zone.
The precarious debt situation resulted from massive borrowing (2013-22) to underwrite aggressive infrastructure development, such as the standard gauge railways, roads and energy projects.
In 2014, Kenya’s status transitioned to lower-middle-income (frontier) economy, closing off the country’s access to cheap long-term concessional loans.
Consequently, Kenya was forced to start relying on short-term commercial debt and Eurobonds, with high interest rates, to plug fiscal deficits.
The Auditor-General and Controller of Budget (FY 2021/22 published reports) have consistently flagged Eurobonds and other offshore debts obtained in the last decade as shrouded in mystery due to difficulties in tracing them.
The reports are particularly clear on the fact that the unilateral decision of the government to open offshore accounts ostensibly to facilitate settlement of sovereign debt obligations deepened the traceability quagmire.
Parliament has never quite granted formal approval to the government to open or keep borrowed public funds in offshore debt accounts.
John Mbadi, the Cabinet Secretary for National Treasury and Economic Planning.
Photo credit: File | Nation Media Group
Under Article 206 (1) of the Constitution, and the Public Finance Management (PFM) Act of 2012, money borrowed or raised by the government must be deposited directly into the Consolidated Fund unless an Act of Parliament specifically provides otherwise.
In the case of Eurobonds, investigations and audits revealed that instead of all the money flowing into the Consolidated Fund as required by the Constitution and the PFM Act, large sums were kept in offshore accounts.
Attempts by constitutional bodies to trace any projects linked to the funds have not been successful, constantly raising the question of odious debts.
A more fundamental problem is that repayments of these expensive funds (5.9 to 10.375 per cent coupon rates) have messed up Kenya’s fiscal efficiency rates vis-a-vis IMF and other global benchmarks.
For instance, the country’s Debt-to-GDP, fiscal deficit-to-GDP, ordinary revenue-to-GDP and debt servicing-to-ordinary revenue ratios are 67.6 per cent, 4.8 per cent-5.4 per cent, 14.3 per cent and 60-80 per cent against global fiscal efficiency benchmarks of 50 per cent-55 per cent, three per cent, 15 per cent and 30 per cent, respectively.
Kenya’s aggressive borrowing and opaque management of offshore loan funds in the past decade have occasioned severe fiscal strain, forcing the country to operate outside several ideal benchmarks despite consolidation efforts.
The inherited massive scale of debt repayment has created many challenges to the government. Given the legal status of debt servicing as a “first charge” on the Consolidated Fund, a 70 per cent outflow of collected ordinary revenue to creditors routinely leads to severe fiscal squeeze.
Besides, it hampers the government’s long-term objective of lowering taxes. To achieve its objectives, the government has to borrow heavily from domestic sources through Treasury bills and bonds, effectively crowding out the private sector from credit access.
Furthermore, about 64 per cent of Kenya’s offshore debt is denominated in US dollars.
Repaying these and other loans depletes foreign exchange reserves, putting pressure on the shilling and elevating the cost of critical inputs such as fuel, leading to increases in localised inflation.
Eurobond.
Photo credit: | Shutterstock
Besides, when the shilling weakens against the dollar, the real value of the debt and the cost of repaying it, automatically balloon without any new borrowing taking place.
To make the situation worse, the Gen-Z uprising against the 2024/25 Finance Bill made it extremely unpopular for the government to consider introducing any new taxation measures.
To keep the country afloat, the government has designed an innovative fiscal consolidation strategy that incorporates expenditure rationalisation, currency management, tax administration modernisation and debt restructuring optimisation.
Regarding expenditure rationalisation, a zero-based budgeting approach has been introduced, where expenditure is justified from scratch. This eliminates budgeted corruption.
Non-essential travel and hospitality budgets are under strict controls. Leasing policies have been introduced to curb high upfront capital drains. To minimise the impact of foreign exchange fluctuations on debt values, the government is in the process of re-denominating expensive dollar-denominated debt into cheaper currencies like the Chinese Yuan.
Regarding modernisation of tax administration, the Kenya Revenue Authority is deepening digitalisation to promote data-driven, intelligent tax administration that uses technology and electronic mapping to tap into the huge potential of the informal sector and eliminate leakages.
Under the new liability management plan, expensive short-term debts are being swapped for cheaper, longer-term concessional loans to ease immediate cash flow pressures.
The latest innovation in the government’s fiscal strategy arsenal is the shifting of the burden of major infrastructure projects from the state budget by utilising public-private partnerships and infrastructure bonds.
The politics-driven public debates in Kenya tend to blur critical issues in favour of what is popular, often misleading ordinary citizens.
To discharge their civic duties responsibly, citizens need to understand the real challenges facing the country and the efforts the government is putting in place to mitigate them.
This government inherited a tremendous debt burden, which has imposed a huge bottleneck on its ability to provide quality public services.
By crafting an innovative fiscal consolidation strategy, the country is slowly pulling itself, by its bootstraps, out of the debilitating debt burden.
Prof Ongore is a public finance and corporate governance scholar based at the Technical University of Kenya. [email protected]
