Very soon foreign investors will treat Kenya Government like a Leper

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By Kenya Confidential Economic Affairs Editor, Nairobi – My 11, 2019

President Uhuru Kenyatta government has over the last six years behaved like the Biblical Prodigal son squandering billions of shillings in Foreign Exchange accumulated by President Mwai Kibaki over ten years and overburdening Kenya citizens with foreign loans it cannot service without borrowing more.

Between January and February this year Treasury borrowed an average of Ksh2.1 billion every day, gluttonously gulping Ksh126.4 billion in loans and raising Kenya’s total debt load to Ksh5.4 trillion.

In the 12-months to February this year, credit to the private sector grew by 3.4 percent, far below the 12 to 15 percent considered to be ideal for powering strong economic growth. However, Commercial banks’ holdings of government debt went up by 13 percent in the same period, to Ksh 1.46 trillion.

Latest indebtedness data published by the Central Bank of Kenya (CBK) shows that domestic debt rose by Ksh 142.6 billion to Ksh 2.692 trillion in the period, while external debt contracted marginally by Ksh 22 billion to Ksh 2.707 trillion. That is a perfect picture of a State House and Treasury in chaos.

The government has scaled up its greed for borrowing through Treasury bonds and bills this year, taking advantage of high demand from investors. Kenya risks defaulting on its debt obligations in a decade if the current appetite for borrowing remains unchecked, a think tank has warned.

Disturbing details on the country’s indebtedness emerged soon after President Uhuru and ODM leader Raila Odinga left the country for China to secure the abortive Ksh 368 billion loan for expansion of the standard gauge railway (SGR) to Kisumu.

The SGR expansion was shelved when China declined the demand for an investment buried in land compensation scandals and mounting losses. Soon foreign investors will be treating Kenya like a leper.

The Institute of Economic Affairs (IEA) in survey revealed that if the country’s appetite for borrowing continues, it risks defaulting on repayment in 10 years. The IEA showed a trend where the government has been using more than two thirds of its revenue to cater for recurrent expenditure since 2013 when the so-called UhuRuto came to power, and the amount used to service debts is sprawling uncontrollably every year.

During the financial year 2013/14, 44 per cent of the money used to cater for recurrent expenditure by the national government was used to service debts. The amount has been rising since 2013, when it stood at Ksh 331 billion. In total, the government lately spent Ksh 962.56 billion of its budget on mandatory payments, the money drawn from the consolidated fund.

The fast-tracked borrowing from the domestic market—mainly from commercial banks— is bad news for the private sector, suffering hardships to secure loans from the lenders. The state itself is shackled by Corruption that is tightening the grip even as Uhuru screams hoarse while his deputy William Ruto says he does “not believe Corruption can stop a leader from delivering”.

The SGR whose cost skyrocketed with fraudulent compensation of land is a typical example of how corruption can stop a leader from delivering. Some of the land compensated in hundreds of millions was government land grabbed by speculators and sold back to the government. Billions worth many other projects that have been frustrated by corruption are white elephants even a blind person can see at night.

Free wheeling borrowing by the Jubilee administration has seen the threshold of debt to gross domestic product (GDP) cross well over the 50 percent mark, raising concerns over ability to repay the loans. The Treasury’s insatiable appetite for more debt from domestic lenders is forecast to continue due to lower-than-targeted revenue performance by the Kenya Revenue Authority.

The target for domestic borrowing for the current fiscal year stands at Ksh 310 billion, while external creditors are expected to plug in Ksh 321.5 billion in order to fill the Ksh 635 billion fiscal deficit. Both foreign and domestic borrowing appear to be driven by greed for cash scooped from public coffers.

By the end of February, the government had borrowed 66 percent of the domestic target from the market. In the first quarter of the year, Treasury Bill subscriptions averaged 147 percent. Even when expensive bids by CBK were rejected, the stock of outstanding securities rose by Ksh 67.5 billion in the first two months of 2019.

Treasury bonds have also become a favourite for investors. In January and February, the Treasury sought a total of Ksh 102 billion in bond auctions (including one tap sale), receiving total bids of Ksh 247 billion and accepting Ksh 115.3 billion.

The Treasury, however, took advantage of the high inflows from the securities market to cut its outstanding overdraft at CBK by Ksh 26 billion to Ksh 19.7 billion in the period. Maturing securities are expected to keep the market liquid, which should make it easier for the Treasury to achieve its borrowing target.

External borrowing has been harder for the government, which has in the past few months said it is being held back by high interest demands especially for commercial debt. The Treasury is yet to issue the expected Eurobond well into the second half of the fiscal year, and is instead mulling taking up a syndicated loan to roll over maturing foreign debt.

In 2018/19 that amount rose to 58 per cent, as money used to pay wages shrank by seven per cent. By last year, the government was using over Ksh 870 billion of its budget to pay debts, up from Ksh 649 billion in the financial year 2017/18 and Ksh 417 billion in 2016/17.

Experts from IEA also noted that Kenya has been borrowing from China, whose loan terms are harsh and which does not do due diligence studies before issuing loans, as opposed to Western countries, which are strict on how a country governs itself before approving lending.

“Loans from China accrue more interest and require a shorter time to service as opposed to bodies such as the World Bank or the International Monetary Fund,” said IEA’s John Mutua.

The organisation’s survey also pointed out that Kenya’s ability to service its debts as compared to the revenue ratio has been declining since 2017. The habit of Kenya Government turning to Euroband will have negative impact on foreign investors. They need not put their money in Kenya as business investment when they can put it in the internationally buttressed Eurobond.

Foot Note:

What lesson can Kenyans as the providers of taxes that run the government learn from the Prodigal son parable? Is Uhuruto couple representing the prodigal son worth forgiving?

The Parable of the Prodigal Son is found in Luke chapter 15, verses 11-32.

The main character in the parable, the forgiving father, whose character remains constant throughout the story, is a picture of God. In telling the story, Jesus identifies Himself with God in His loving attitude to the lost.

The younger son symbolizes the lost (the tax collectors and sinners of that day, Luke 15:1), and the elder brother represents the self-righteous (the Pharisees and teachers of the law of that day, Luke 15:2). The major theme of this parable seems not to be so much the conversion of the sinner, as in the previous two parables of Luke 15, but rather the restoration of a believer into fellowship with the Father.

In the first two parables, the owner went out to look for what was lost (Luke 15:1-10), whereas in this story the father waits and watches eagerly for his son’s return. We see a progression through the three parables from the relationship of one in a hundred (Luke 15:1-7), to one in ten (Luke 15:8-10), to one in one (Luke 15:11-32), demonstrating God’s love for each individual and His personal attentiveness towards all humanity.

We see in this story the graciousness of the father overshadowing the sinfulness of the son, as it is the memory of the father’s goodness that brings the prodigal son to repentance (Romans 2:4).

Kenyans expect repentance from their President and his government institutions which host corruption driven  by insatiable greed.