Sixty-eight shillings and thirty cents out of every 100 shillings of taxes paid in the last financial year, went to pay debt.
That left only thirty-one shillings and seventy cents for pensions, salaries and wages, and to occasionally, share with counties, build a road or finance higher education. That is why government classifies itself as being in high risk of debt distress in a recent report.
One thing that the public sector is good at is producing reports – particularly those demanded of it, by various acts of parliament.
The Annual Public Debt Management Report for 2023/24 financial year is out and was tabled in the National Assembly last month on October 2nd. You should take a look.
Last financial year, ordinary revenue was 2.29 trillion Kenya shillings. Of course, there is nothing “ordinary” about taxes. Rather, tax revenues are the sweat and toil of Kenyans.
In government reporting, however, taxes have routinely been referred to as “ordinary revenue”, as though it is easy to come by. Perhaps if we referred to them as hard earned, the bureaucracy and politicians might treat our taxes with more seriousness.
At 1.56 trillion shillings, total debt service for the last financial year was 68.3 percent of the ordinary revenue. Of that, the larger part, 841 billion shillings or 36.7 percent of tax revenue - was interest, comprising 623 billion shillings in interest on domestic debt (27.2 percent of tax revenue), and 218.2 billion shillings in interest on external debt, equivalent to 9.5 percent of revenue.
But since government tries to build more than one road at a time, they borrow more. Last financial year the government borrowed 818.3 billion shillings to cover the budget deficit.
Of that, 595.6 billion was raised from the domestic market. But be careful how you interpret that number. This is new debt. Government routinely borrows to pay older debt.
In the results of weekly and monthly domestic debt auctions, this amount is described as roll over and is about twice the new debt.
The total issues of treasury bills and bonds were about 1.5 trillion for the year.
In external debt, roll-over goes by the sophisticated sounding title of liability management operations. There was one such operation last February. Government issued a $1.5billion euro bond and used the proceeds to retire an earlier one that was maturing.
Sharing nationally raised taxes with counties is constitutionally mandatory. As are pensions. Not much is left for anything else. That is why the roads and infrastructure program has all but stalled, and health and education are in a financial crisis.
Government has three options. One route, emphatically rejected by Kenyans last June, is to increases taxes even more. Treasury has published some new bills to test waters, suggesting that the lessons of June were not fully internalised.
Government can also choose to live within its means. As a matter of fact, it often promises to do so.
Every report and document from the Treasury for the last several years talks about fiscal consolidation, and improvements in the governance of public finance, euphemisms for budget cuts and fighting corruption.
A better option is to reduce interest rates. For a short window, low domestic inflation and reduction in US interest rates, mean the determination of domestic interest rates is completely at the discretion of the government.
It is unclear what monetary policy objectives government is currently pursuing, that forces them to keep the CBK policy interest rate at 12 percent.
They certainly cannot be trying to contain inflation, which at 2.7 percent in October, was the lowest in decades. To be fair, this low inflation is the result of both providence – two years of good rains - but also the tightest monetary policy since perhaps 2011.
That success in controlling inflation came at enormous cost. When government issued a 213.4 billion shillings, tax free, seven-year infrastructure bond mid-June 2023, it was at 15.84 percent interest rate.
In July of the same year, a re-opened five-year bond raised 22.6 billion at 18.2 percent! That is why domestic interest payments on public debt are three times external interest payments.
Worse, is the crowding of the private sector from the credit market. The total commercial banks’ loan book has been shrinking this year.
This implies limited economic growth and consequently, underperformance of tax revenue for 2024/25. The resultant more borrowing will mean we are firmly in a vicious cycle.
Lower interest rates will provide a much-needed boost to private sector, spurring growth and tax collection. And it will also reduce interest paid on domestic debt, freeing hard-earned taxes for other pressing needs.
The writer is an economist, is Partner at Ecocapp Capital
