Debt Distress and Debt relief - Kenya

5 years ago by Onyari Nyakundi. PhD

On the 22nd of May, the President, Uhuru Kenyatta, during his eighth presidential address on corona virus to the nation announced his administration’s 8-point Economic Stimulus Package amounting to KES 53.7 billion. The package targets specific sectors in the economy -education, infrastructure, small and medium enterprises, health, agriculture, tourism, manufacturing and environment- with an aim of stimulating economic growth and shielding families from the effects of the coronavirus pandemic. To finance this recovery programme, however, the government has been forced to implement budget cuts among other fiscal measures. Through restructuring of the for the 2020/2021 budget, KES 28.9 billion was allocated to the stimulus programme. The rest of the shortfall in financing is intended to be filled by allocations from the sports fund (KES 43.6 billion), the donor fund (KES Nairobi Metropolitan fund (KES 26.4 billion), the road annuity fund (KES 7 billion) and surpluses from state corporations (KES 12.3 billion).

STATE CORPORATION SURPLUSES

In the first half of the year, the Treasury netted a total of 78.54 billion in non-tax collections from state corporations. This came at a time when the Treasury CS, Ukur Yatani, had issued a directive to state corporations to surrender their surplus cash in a bid by the government to clear a backlog of pending bills. The CS, consequently, doubled the non-tax revenue collection target of KES 69.33 billion earlier set in the beginning of the financial year to KES 138 billion. Therefore, this collection accounts for 56.56 % of the 2019/2020 target and KES 20.35 billion more than that collected in the previous fiscal year, 2018/2019.

The push toward the collections of surplus funds from corporations came after the miscellaneous amendments to the Kenya Revenue Authority (KRA) Act and the Public Finance Management (PFM) Regulations, through the Finance Act 2018 that gave authority to KRA to collect 90% of surplus cash from State Corporations. Prior to this, the state corporations invested their surplus cash in different projects at their discretion and only handed over dividends to the government. These regulations now require state corporations to request approval from the government before investing any projects. These regulations also demanded the corporations to remit reasonable dividends to its shareholders According to the Budget Outlook and Review Paper 2019, dividends received from state corporations in the year were below target. The government received KES 24.1 billion against it target of KES 31.6 billion, a decline of 16.5% from the previous financial year. This restructuring of the cabinet will avail KES 28.9 billion.

After these regulations, only a handful of corporations handed over their surplus cash to the government. This underperformance was blamed on lack of enforcement measures and a lack of specific deadlines of which the state corporations are supposed to forward their surplus. Since then, further amendments were made to the act which set the deadline for submission of the cash surplus to 31st October.

This move was face with a lot of criticism from different stakeholders as it would bring a shortfall in cash necessary for the day to day operations of corporations and contingencies. Parastatals also use this cash to help boost their balance sheets as they seek credit from commercial banks and financial institutions. The treasury, however, claimed that these measures were not being undertaken without consultation and that it was being implemented in a very orderly form; they review the balance sheets, projected requirements and how much of surplus of the corporations could be remitted.

According to a report conducted by Kenya Association of Manufactures and KPMG, businesses in the country have been forced to suppress their agenda of growth and expansion and instead focus on job retention, reduction of costa and improving cash flow in order to survive through the pandemic.

According to the report, 78% of manufactures top priority is to reduce costs, with 61% manufacturers are being keen on job retention. 53% of manufacturers are giving priority on improvement of cash flows. 40% of manufactures at the time of the survey had reduced their casual employees while 17% had reduced their permanent workforce. On the demand side, 91% off manufacturers in the non-essential sector of the economy were experiencing a significant reduction in demand in contrast to 71% among those in the essential sector witnessed. These figures paint a picture of a struggling economic sector.

With the state corporates mostly being involved in the essential services sectors, it is highly unlikely that they will be spared from the effects of COVID-19. The surplus cash that may be available to state corporations is highly likely to be diverged to measures aimed at keeping operations going and maintaining their workforce.

The country has consistently failed to meet revenue targets in the past. Civil societies have questioned the treasury’s ability to fund the 2.7 trillion budget who are worried that the consistent failure of the government to meet its target coupled with its appetite for for debt will downplay any efforts to revive the economy. The Parliaments Budget and Appropriation Committee also made similar concerns in a report tabled in parliament.

The government is expected to spend KES 900 billion on debt repayments in the FY’2020/2021.

LOOMING DEBT CRISIS

Kenya’s Debt Profile

It has been clear for a while that the debt level of the country is unsustainable. In the recent years, although a systemic debt crisis was not eminent, the country’s rapid increase in debt and its servicing cost has been quite alarming. In March 2020 amid outbreak of the corona virus pandemic, Kenya’s stock of external debt rose by a staggering KES 150 billion after buckling of the shilling. The country’s external debt rose from KES 3.11 trillion in December to KES 3.27 trillion was after the shilling lost ground against the dollar by 500 basis points. The measures adopted by countries in their efforts to contain the spread of the virus resulted to poor financial inflows for the country as a result of decreased tourism receipts and export earnings. This in turn has depleted the country’s foreign reserves.

In December 2019, according to international credit rating agency, Fitch rating, Kenya’s credit rating stood at B+ owing to.

The pandemic hit the country at a time when the country was struggling with a mounting public debt ($60 billion), consecutive years of missed revenue targets and a budget deficit of 6% of the GDP.

For the past years, the country’s total expenditure has continued to grow at a compound annual growth rate of 6% to KES 2.8 trillion in 2019/2020 up from KES 1.3 trillion in the 2013/2014 financial year. This revenue growth of the same period, on the other hand, has grown at a much slower rate of 13.1%, from KES 1.0 trillion IN FY’13/14 to KES 1.9 trillion in FY 2019/2020. This has resulted to an increase in the fiscal deficit from KES 0.3 trillion (5.6% of GDP) to KES 0.9 trillion (8.0% of GDP).

This necessitated the government to borrow in order to finance its deficit. The continued borrowing has in turn increased the country’s debt-GDP ratio from 46% to 62% in the similar 6-year period according to IMF. This figure is higher than the IMF recommended ratio of 50%.

To enable more borrowing, the government amended the Public Finance Regulation (PFM) regulation and moved the country’s debt ceiling to a concrete figure of KES 9 trillion from an earlier debt-GDP ratio of 50%. The country’s ration of external to internal debt ratio currently stands at 51:41: KES 3.2 trillion in external debt and KES 3.1 in domestic debt. The country’s public debt in recent years has inclined towards a commercial funding structure comprising of syndicated loans and Eurobonds as opposed to multilateral and bilateral debt. In June 2013, the bilateral and multilateral debt accounted for 90% of the country’s external debt while in December 2019 it accounted for 66.4%. Commercial loans on the other hand has grown from KES 58.9 billion to KES 1.0 trillion, corresponding to 33.1% of the country’s foreign debt. Suppliers credit account for the remaining 0.5% of the GDP. In this year’s Kenya Budget Speech on June 9th, Cabinet Secretary, Ukur Yattani, acknowledged that there was need by the country to move to more concessional loans. To date the government has received $1 billion dollars from the world bank and $739 million from the International monetary organization (IMF) to help it in its coronavirus effort.

Covid-19 impact on the economy and Kenya’s debt sustainability

The International Monetary Fund (IMF) revised their projection of the country’s GDP from 6.0% earlier in the year to 1% after the onset of the corona pandemic. The Treasury Cabinet Secretary, Ukur Yattani, in his budget speech was optimistic and speculated the economy would grow by 2.5% in the current year and speculated a 5.8% economic growth in 2021. With a country’s debt sustainability measured by its ability to service its debt, Kenya’s sustainability continues to be affected by low revenue collection and increased borrowing costs occasioned by the pandemic.

Revenue collection in the country has dwindled as a result of the impact of the virus to key sectors of the economy such as manufacturing, agriculture and tourism which have been affected by supply shocks, reduction in exports and reduced tourist numbers. Furthermore, collections are expected to dwindle further as a result of the recently signed Tax Amendment Bill 2020 into law. The Bill reduced Income tax and VAT in an attempt by the government to cushion individuals from the negative impact of the pandemic. Previously, the government relied heavily on this tax rackets to raise it revenue: VAT and Income tax cumulatively contributed to 60.8 % of total revenue in the FY’2019/2020 total revenues. The Kenya Revenue Authority collections in April 2020 stood at 20.1 billion which is lower than the amount they collected last year at a similar period. With April being a critical month in the tax cycle collection, these figures are quite worrying. It is also worthwhile to note that although KRA revenue collection has grown consistently, they have not met their targets since President Uhuru Kenyatta came to power.

With the country’s foreign debt denominated in foreign currency, the recent volatility in the exchange rate occasioned by the pandemic has negatively affected its borrowing rate. As on June 2020, the YTD depreciation of the shilling against the dollar stood at 5.1% compared to 0.5% at a similar period in 2019. This has made the external debt of the country more expensive with 69% of the being denominated in US dollars. The remaining is denominated in Euro (18.1%), Chines Yuan (5.5%), Japanese Yuan (4.5%), Great Britain Pound (2.6%) and other sources (0.3%).

Following the coronavirus pandemic, the governments expenditure will increase to KES 2.8 trillion in the FY 2019/2020 as a result of spending on healthcare and other measures to withstand the effects of the pandemic. In consequence, the fiscal deficit in 2020 is expected to rise to 8.3 % of the GDP compared to 6.3% in the previous year, therefore, putting more pressure on the government to increase domestic borrowing. To fill the gap the government has increased its domestic borrowing from KES 300.3 billion as per initial 2020 Supplementary budget II to KES 404.4 billion.

In the 2020/2021 budget the government expects to have a total revenue collection of KES 1.8 trillion against a total expeniture of KES 2.7 trillion, thereby, leaving the government with a deficit of KES 858.8 billion, the biggest in the country’s history. This will see the government borrow KES 736 billion in the 2020/2021 fiscal year.

Therefore, Kenya stands at a high risk of debt distress as a result of poor revenue collection expected in 2020 and higher financing costs occasioned by the pandemic which advertently will affect its debt servicing capabilities.

FEASIBILITY OF GOVERNEMNT MEASURES

On the 23rd of May, president Uhuru Kenyatta announced the Economic Stimulus package whose aim was to cushion Kenyans from the COVID-19 pandemic. The stimulus package concentrates on agriculture, health, education and infrastructure among other key sectors of the economy. This stimulus package, however, does not seem to address investment spending and consumer demand.

Although the pandemic has resulted to closure of businesses and lose of jobs, it has exposed the governments failures in creating a conducive business through its punitive tax regimes and its inability to create employment and entrepreneurial opportunities.

The stimulus package does not look into the dwindling household expenditure and investment spending. The government ought to be addressing issues of long-term employment and creation of entrepreneurial opportunities as opposed to expenditure on education, infrastructure, health, agriculture and water. These should not be included in a stimulus package as they form the backbone of an economy and should be areas of continued expenditure.

The measure implemented by the government to fast track the payment of pending bills and to hasten VAT refunds does do not amount to a stimulus because it simply does not stimulate new spending.

The size of the stimulus, also, in comparison to the size of the economy is a matter of concern. The stimulus package of KES 53 billion will not have much of an effect to a KES 9.7 trillion economy. The size of the package translates to 0.6% of the country’s total GDP. South Africa for instance, initiated a 500-billion-rand economic stimulus programme which was intended to sustain demand and supply as well as shield the most vulnerable among its population. Out of this amount, 200 billion was allocated to a loan scheme for those businesses hardest hit by the pandemic. In Kenya’s case only KES 6 billion $56 million) was allocated to a loans and guarantee scheme. The country, prior to the pandemic was already reeling from a weak fiscal trajectory and therefore, it will need to spend a significantly more if it is to avoid a significant economic downturn.

Transparency and accountability in handling of the emergency fund is also a matter of concern. Such a crisis creates an opening for corruption. To ensure that the funds are appropriately utilized, the government ought to aggressively implement measures such as open contracting and also engage the stakeholders and civil society and also employ a vigorous performance management framework. Taking into account the country’s past history of poor record of transparency and accountability, this might be the programmes Achilles heel.

DEBT RELIEF

Kenya’s debt-service ratio at the end of 2019 stood at an estimate of 45.2%. This is 15% higher than the recommended threshold. Given the ongoing pandemic and its general effects on the economy, it puts the country at an elevated risk of repayment. In that financial year, the government set aside KES 800 to finance it debt with a large chunk of this going to China.

As of December 2019, Kenya’s total debt to china stood at KES 693.1 billion accounting for 67.7% of the country’s bilateral debt. This figure is approximately five times larger than the amount owed by the single bilateral lender to the country, Japan (KES 137.2 billion). Kenya’s bilateral risk, therefore, is concentrated in China.

The Treasury has been asked by civil society and other stakeholders to initiate talks with different stakeholders to try and restructure the country’s foreign debt as the economy takes a hit from the pandemic.

However, the CS Ukur Yattani made it clear that the country will not be seeking a suspension of debt payment under the G20 initiative which aims to help poor countries weather the effects of the COVID-19 pandemic. He made it clear that the country is cautious on the negative effect the relief might have on the country. This is because the country is looking to finance its budget deficit later in the year and the terms of these deals will limit Kenya’s access to international capital markets.

Nonetheless, the country has been engaging their creditor countries such as Japan, Germany, Sweden, China and France individually with an intention of securing moratoriums om debt service repayments that would last for around a year. In a video link between Xi Jinping and several African leaders among them President Uhuru Kenyatta, Cyril Romaphosa of South Africa, Macky Sall of Senegal and Prime Minister of Ethiopia Abiy Ahmed, he confirmed that China would cancel the debt to all relevant African countries that was advanced in the form of interest-free government loan. He further emphasized that China will work with the global community in an effort to support African countries by measures such as extending periods of debt suspension to help them address the effects of the pandemic in their respective nations.

Sources

• www.treasury.co.ke
• Treasury Publications
  
• Budget Highlights FY 2020/21 - The National Treasury
• The Impact of COVID-19 on the manufacturing sector in Kenya
• www.imf.org
• The Covid-19 sock to Developing Countries