This is what’s really wrong with Kenya’s debt

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This article first appeared in my column with the Business Daily on August 2, 2015.

The International Monetary Fund (IMF) and World Bank recently raised the red flag over debt, stating Kenya must put a tight lid on it to keep its economy on a steady growth path.

According to the Business Daily, Kenya’s debt load crossed the 50 per cent of gross domestic product (GDP) mark to stand at 57 per cent by end of December 2013.

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(source: http://valleysleepcenter.com/blog/wp-content/uploads/2014/03/bigstock-Debt-Concept-298380591.jpg)

But our problems are not the GDP to debt ratio; they run much deeper and are structural in nature. One of the real problems is the way the government spends money, including debt. It is imprudent and unsustainable. For the past two years most government spending has gone to recurrent expenditure.

Analysis by the International Budget Partnership (IBP) indicates that in 2013/14, the government spent 78 per cent of the budget on recurrent expenditure. For 2014/15, government recurrent expenditure is estimated to have eaten into 63 per cent of the budget. This year, recurrent costs are set at 52 per cent of the budget. In short, in the past recurrent allocations and spending have trumped those for development. This is a concern as it informs our debt appetite and will determine debt consumption. The government has been accruing debt yet most of the money goes to consumption, not development.

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(source: http://www.australiannationalreview.com/wp-content/uploads/2015/04/salary-increase-e1429456030238.jpg)

To make matters worse, the little money left over for development spending goes unspent. An analysis of the fourth quarter of the 2014 State budget by the Institute of Economic Affairs reveals that the government has a challenge in using the development budget; only 52 per cent of this budget was utilised by the end of the financial year.

Simply, we do not seem to have the absorptive capacity to spend the development budget. So Kenya does not have the spending infrastructure to seed the economic growth required to pay back the debts government has taken on.

This is not a spending formula that will lead to economic growth. Yet this is the very same economic growth required to pay back the accrued debt.

The seriousness of this issue comes into further focus when one realises that on top of all these dynamics, Kenya is an import economy and thus always falls short on raising the foreign exchange in which international debt is paid back. Kenya sells shillings to raise dollars to pay back global debt, so the government is always at a disadvantage.

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(source: http://alluaeoneae.c.presscdn.com/wp-content/uploads/2015/01/UAE-Imports-Exports-ReExports.png)

In the context of the shilling tanking against the dollar, government debt is becoming more and more expensive. So the government has a structural spending problem in the context of an import economy and a depreciating shilling.

These are the problems with Kenya’s debt, not the GDP to debt ratio. What is required to address Kenya’s debt problem is to first, drastically cut down on recurrent expenditure. Secondly figure out how to effectively spend the development budget and, thirdly, in the long term fundamentally reorient the economy into an export economy.

Once these three factors are taken on board, Kenya will be a much healthier space to service the debt the government has been accruing.

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