A failure by the government to institute radical changes in its way of doing businesses may compound the country’s liquidity problems further
BY SILAS APOLLO
At the start of the year when the government proposed an introduction of a new set of taxes on basic goods and commodities, the idea was to find a way of raising additional revenue for the exchequer.
The move was to help the country mitigate a financial crisis that had been occasioned by heavy borrowing and to reduce the current public debt stock that has since crossed the Sh10 trillion ceiling that had been set by Parliament – the debt crossed the Sh10 trillion mark by about Sh278 billion as at June 2023, with revenues collected by the Kenya Revenue Authority (KRA) also falling short of the set targets.
The new taxes, introduced through the controversial Finance Act of 2023, were billed as a necessity for a government that was reeling under heavy debts in the face of dwindling revenues and an impending loan distress.
Additional levies were also proposed and passed as part of a deal signed between the government and the International Monetary Fund, much to the opposition of some policy makers, politicians and the public. But with just three months into the new financial year, and additional levies and taxes already in place, the country’s financial distress seems to be far from over.
By June 30, 2023, KRA had collected about Sh2.166 trillion in revenue for the 2022/23 financial year, missing its target by about Sh107 billion. The figure however, was an upward growth of Sh135 billion that the agency had collected the previous year.
While part of the revenue dip has been blamed on a number of factors including cases of tax evasion and avoidance, instances of reduced expenditure and low spending power by most Kenyans due to the harsh economic times have been linked to the problem.
Investors have also been moving to other destinations, including to neighbouring countries such as Tanzania, further pointing to what could be a reduction in jobs and revenue for the government.
Some experts, such as the office of the Controller of Budget are now sounding the alarm and warning that a failure by the government to institute radical changes in its way of doing businesses may compound the country’s liquidity problems further.
Controller of Budget Margaret Nyakang’o, in a recently published report on government expenditure, argues that factors such as low investor confidence and the weakening Kenyan shillings could potentially worsen matters if not addressed.
Dr Nyakang’o, in the national government budget implementation review report for the 2022/23 financial year further notes that other issues such as the growing public wage bill and pending bills are also some of the risk factors that the government faces in managing the current debt and expenditure crisis.
These factors, the report notes, added to the ongoing fiscal policies and decisions including the recently introduced taxes, may pile extra pressure on the government in the wake of the ongoing fiscal constraints.
An analysis of the domestic debt by the report, prominently shows that investors over the last one-year period have been opting for the shorter 91-day Treasury Bills, which is attributed to avoidance of duration risk.
On several occasions, the report notes, the government could not raise adequate funds on the domestic market from Treasury Bonds, an indication that investors are keeping away from long-term lending.
The public debt payment is usually a first charge on the Consolidated Fund hence inadequate collections from Treasury Bonds imply increased debt payments on Treasury Bill redemptions at the expense of the recurrent and development expenditures.
Consequently, the depreciation of the Kenyan shillings against the US dollar has also made the country much more vulnerable to increased repayments including on interests charged on loans as well as on the principal amounts.
The country’s public debt stock as of June 30th 2023, stood at about Sh10.25 trillion from Sh8.63 trillion reported on June 30th 2022, a figure way above the ceiling set by Parliament, with a significant amount of the public debt denominated in foreign currencies.
Dr Nyakang’o notes that the depreciation of the Kenyan shilling caused an increase in the debt stock and debt repayments (principal and interest) in Kenya Shilling terms.
This continuous depreciation of the Kenyan shilling, she points out, is likely to necessitate an increase in the amount required for loan repayments. The situation may also erode the government’s fiscal space and limit the implementation of other critical policies and programs, resulting in budget adjustments.
“The exchange rate between the Kenya Shilling and the US Dollar was roughly Sh117.87 in July 2022, while in June 2023, it averaged Sh141.14, a difference of 23.27 shillings (approximately 18.9% exchange rate depreciation),” Dr Nyakang’o said.
While appearing before the National Assembly in October this year to update MPs on the country’s fiscal position, Treasury Cabinet secretary Njuguna Ndung’u admitted that the external pressure against the Kenyan shilling was to blame for most of the new debt stock.
The CS however, argued that the government had so far put additional measures in place to mitigate the situation, including plans to raise a net amount of Sh718 billion for the current financial year, 2023/24.
“This will be achieved through a combination of Sh131 billion in net external borrowing and Sh587 billion in net domestic borrowing,” Prof Ndung’u said.
Additionally, the CS informed Parliament that a Eurobond, amounting to $2 billion, is due in June 2024, a sum which has already been included in the approved budget for the 2023/24 fiscal year.
“The National Treasury has engaged Joint Lead Managers (JLMs), including the Standard Bank and Citi Bank, to assist the government. The settlement options include access to the International Capital Market and alternative financing from multilateral and bilateral sources, including bank syndications,” said Prof Ndung’u.
The new public debt stock currently comprises Sh5.44 trillion in external debt, making up 52.9% of the total public debt, and Sh4.83 trillion in domestic debt, accounting for 47.1% of the total public debt.
Dr Nyakang’o however, argues that there is an urgent need by the government to audit the already existing loans and some of the projects financed by the already borrowed loans. She says that the lack of fiscal discipline and consolidation in government is also making the situation worse, and calls on the government to streamline revenue collections and enhance efficiency in tax administration.
She explains: “The Controller of Budget recommends a special audit of existing and committed loans to link the loans with the projects funded through borrowed funds.”
This, the CoB says, will help eliminate issues such as tax evasion and improve compliance and help widen the tax base and ensure government subsidies are aimed at supporting production for higher economic growth.
“Further, the office observed that the National Treasury has, over the years, acquired and absorbed loans on behalf of profitable Semi-Autonomous Government Agencies. These loans should be reviewed with the aim of transferring payment obligations to the Agencies,” she adds.
