Recently there has been a lot of talk about our public debt. It is therefore necessary for all to understand what the issues are with our public debt. This will help in informing public debate on the issue. Besides it is easier to develop solid solutions when you are clear on the issues.
Our current debt problems can be summarised as follows;
Collapsing of the budget making process – Since 2013 our budget making process has become chaotic and incoherent. It can be described as a calamitous circus. The budget is nowadays a moving target where changes are introduced throughout the year. This has caused a lot of confusion. For instance people talk of a KShs 3 Trillion budget for the current year yet the actual printed figure is KShs 2.6 Trillion.
The assumptions on which the budget is based such as revenue targets are usually not backed by any evidence. The current revenue targets are KShs 1.9 Trillion up from KShs 1.5 Trillion last financial year. That is a 31% jump in one year. This is an absurdity and fiscal impossibility. Last year revenues rose by 6% what would be the basis for projecting a 31% rise this year especially in a struggling economy.
The budget process begins with a long spending wish list which is followed by a panicked search for revenues. The actual expenditure last year was KShs 2.1 Trillion. The actual expenditure on 2016/2017 financial year was also KShs 2.1 Trillion. What is the point of raising the expenditure to KShs 2.6 Trillion in the current financial year? This has resulted in extracting up to the last drop of blood in terms of taxes to fund the bloated spending plan. Why can’t we begin with the revenues we have and then come up with spending plans on that basis instead of budgeting for expenses then look for funds to finance them. That is what we do with our household and business budgets.
Despite numerous tax rate rises the revenues have flattened with little hope for growth. There is a limit to which you can tax people. Also in the process of raising revenues we have turned the business environment toxic through a chaotic policy environment. An exaggerated spending plan creates room for and encourages looting of public funds.
We have borrowed too much, too fast to the extent that we have all but exhausted our borrowing capacity. Over the last five years annual average growth in revenues was 13% while annual average growth in debt was 22%. This has robbed us the opportunity to continue leveraging on debt to manage our fiscal deficits. We have to look for debt alternatives in financing future budgets. This means either we sell some of our national assets or drastically reduce our spending. Reducing spending will slow down the economy. We are in a situation where you can’t tax people more and can’t borrow more.
Our debt is largely unproductive. We have spent most of our debt on politically driven projects which do not make economic sense. Furthermore, we have spent borrowed money on recurrent expenditure which is an unforgivable economic sin. Our spending has also become sinfully tenderpreneur driven.
Poor parliamentary oversight. Parliament has failed in ensuring our borrowing is sustainable. MPs are only keen about their salaries and CDF allocations as far as budget making is concerned. This has left Treasury with a freehand in recklessly piling up debt. It is a shame we have left the issue of debt sustainability to IMF yet this should be the business of our parliament and indeed a domestic affair.
Lack of transparency in borrowing. The government has failed in keeping an up to date and accurate debt register. As of today nobody in this country actually knows what our total debt exposure is. Take for example the recently released Quarterly Economic and Budgetary Review Fourth Quarter, Financial Year 2017/2018 Period ending 30th June, 2018. On page Vi the document says our total debt is KShs 5.174 Trillion and on page 26 the same document says our total debt is KShs 5.039 Trillion. Which is which? To make things worse significant part of our borrowing has been hidden in books of parastatals such as Kenya Railways, Kengen, Kenya Power etc.
The Central Bank of Kenya has consistently failed to update its website on the public debt in a timely manner. For instance, we are now in September 2018 and the last time CBK updated the debt figures as per its website is March 2018. What is the explanation for such a delay if not mischief?
We have borrowed very expensive money. Before 2013, our external debt was largely cheap bilateral and multilateral loans. As of April 2013, our external debt was KShs 817 Billion and by June 2018 we were at KShs 2.56 Trillion a 213% growth. In April 2013, our expensive foreign commercial debt was KShs 57 Billion and as of June 2017 was at KShs 906 Billion a growth of 1,477%. This is neither acceptable nor sustainable. The risk of debt default are rising by the day.
Our debt servicing costs are no longer sustainable. Last year we spent KShs 324 Billion on interest payment while in the current fiscal year ending June 2019 we are to spend KShs 399 Billion on interest payment. The interest paid last year represents 22% of total revenues. The total spending on public debt in the current financial year is estimated at KShs 871 Billion (principal + interest) against targeted revenues of KShs 1.8 Trillion. The public debt spending is thus 49% of target revenues. These are shocking ratios.
Structural and constitutional issues. The 2010 Constitution came with a new government structure which is quite expensive to maintain. For instance, the hardcoding of County Governments’ issues at 15% of revenues does not make sense inasmuch as it may seem necessary to guarantee funds to county governments. What would happen if this is fiscally impossible? The government structure is just too wasteful. This will make it hard to cut spending. We need to ask questions as to whether the current 47 county governments are sustainable. Do we need two houses of parliament with a combined 416 MPs? Do we need all these constitutional commissions? Do we need Constitution Development Fund (CDF) in this era of County governments?
Bloated and expensive civil service. The current civil service needs to cut fat. A lot of rationalisation is necessary. We have a lot of duplication which should be done away with. Furthermore the government does not even seem to know how much it spends on salaries and wages. For instance it says it spent KShs 384 Billion on salaries and wages for the national government in the 2017/2018 financial year.
The recurrent spending of the Teachers Service Commission was KShs 218 Billion. Can the bill for teachers alone be 57% of the national government wage bill or 23% of its recurrent spending? Even assuming these figures are correct, how can it be that the salaries and wages of national government never reduced even after some functions were taken over by county governments? In the 2012/2013 financial year, the wage bill of national government was KShs 274 Billion. In the 2017/2018 financial years it was at the erroneous KShs 384 Billion a 40% rise.
Political interference with government finances. We have developed this culture of politicians such as the President and his Deputy making unjustifiable political declarations with serious economic implications. The politicians have been making promises on projects without any reference to the budget. This has resulted in fiscal indiscipline and chaos. These politics have exacerbated pressure on borrowing. It has also contributed to the earlier discussed issue of unproductive borrowing.
Notice there is nowhere I have talked about the much debated debt to GDP issues. I have argued so many times that you cannot use GDP to pay debts. You use cash represented by government revenues. As such, it is naïve and irresponsible to use GDP as an excuse or basis for borrowing. This will become clear in the near future.
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