Thursday, 15 October 2015

Comprehending Kenya’s Cash Crunch

To some, it seems to be a derisory situation while to others it seems to be a happenstance that generates a bit of worries and spells doom and gloom for their economic well-being. To make it simple, the current tales of a broke government only seem to be a whimsical situation especially for the pseudo-economists/public policy analysts as they view it as a joke taken too far. But for the real specialists in this field, it is a situation that reflects a government that lives beyond its means occasionally oscillating in debts to fund few capital projects and a recurrent expenditure that is quite prodigious. 

The prevailing financial crisis in government is as a result of four significant phenomenological circumstances. Firstly, the government is spending too much money on two things; an enormous recurrent expenditure and few but costly capital projects. Secondly, the spiraling rate of continued misappropriation of finances is ostensibly another cause of the current financial woes that the government of the day is facing. Thirdly, the International Monetary Fund (IMF) recommendation of the adoption and institutionalization of a pre-emptive approach of debt repayment is another cause. This is an expenditure plan that prioritizes debt repayment. Fourthly, the imprudence that characterizes revenue collection is also another causal factor leading to missing the targeted revenue amount largely as a result of the high incidences of tax evasion among other factors.

Revisiting the IMF recommendation of the adoption of the pre-emptive approach towards servicing of debts, implies that the government’s hands are tied since it was a conditionality for the government to receive funds amounting to Kshs.62 billion intended to support the weakening shilling.  The conditions that are pegged on funds and/or loans by the multilateral economic institutions like the IMF normally constrict the plausible gamut of actions and mechanisms that are supposed to be instituted in the event that an economy requires some urgent attention especially for the developing countries. This is certainly a reality that cannot be wished away.

Basically, the pre-emptive approach of debt servicing involves a proactive step of preparing cheques in advance to repay the debts before they are due. In my opinion, this was a measure that was put in place by the IMF in order to check and contain the situations where by governments were taking too long to repay debts or even in some instances defaulting the same and pleading for mercies from the IMF.

Moving forward, the shortfall in revenue collection is a challenge that needs some well orchestrated plan of action to normalize it. The government should devise ways of sealing the loopholes that evidently lead to these occasional shortfalls. For instance, by the end of last quarter (covering July to September) of the current fiscal year 2015/2016, only Kshs.269.7 billion was collected by the Kenya Revenue Authority. This was Kshs.12 billion less of the expected amount. From the Kshs.269.7 billion collected, Kshs.132 billion (approximately 49%) was used to repay the debts. You can now figure out this tight fiscal and economic situation with two complexities; of a revenue shortfall and prioritization of debt servicing.

The current cash crunch is only a tip of the iceberg of the impending economic woes that are bound to happen because of an increasing national debt that now stands at Kshs.2.5 trillion. The primordial causal factor of this high national debt are the overambitious national budgets that have become the zeitgeist of the Jubilee administration since its inception. Take for instance the budget for the current fiscal year which amounts to Kshs.2.17 trillion, and it has a deficit of Kshs.570.2 billion as Kshs.1.43 trillion is to be financed through the tax revenue. And what if the tax revenue targets are not met? It spells more doom because more borrowing has to be made. 

Already, the government has just borrowed Kshs.77.25 billion from three banks namely the Standard Chartered Bank, CFC Stanbic Bank and Citi Bank. The decision to borrow from these banks as opposed to the selling of Treasury Bills was informed by the level of the interest rates. The Treasury Bills’ interest rate stands at 21.35% in comparison to the London Inter-Bank Offered Rates (Libor) + 5% given by the banks which was lower. 

I envisage that for the medium and long-term economic periods we are still going to be grappling with the issues of a rising national debt and debt oscillations of borrowing and continued borrowing. Why? The current budget and economic Medium-Term Plan (MTP) stipulate that Kshs.2.1 trillion should go towards capital expenditure up to 2018. But the total cost of the on-going capital projects that are to be completed by 2018 is Kshs.4.2 trillion, of which Kshs.1.6 trillion has already been spent meaning that Kshs.2.6 trillion is needed to finalize them. I really doubt if a good number of these projects that are 1109 in total will be completed. Picture this, the budget and the MTP stipulate Kshs.2.1 trillion for capital expenditure up to 2018 and at the same time projects amounting to Kshs.4.2 trillion are also supposed to be completed by 2018. This implies that a deficit of Kshs.2.1 trillion is clouding and this means more borrowing and a rising national debt.

When the national debt will get to the “tipping point” is when we shall be able to feel its effects. An increasing rate of borrowing by the government means that the following scenarios are more likely to happen. First, there will be a general increase in the interest rates meaning the level of investment is bound to decline. Secondly, inflation may be a reality that is if the government resorts to carry out ‘monetization’ which is actually printing more money to fund the deficits. This is a situation that we should not get into as a country. Thirdly, higher taxes will also be a possibility in order to raise more revenue to cover the deficits. Fourthly, the ‘crowding-out’ effect will take place. ‘Crowding out’ is an economic situation where continuous and excessive government borrowing leaves limited finances for the private sector hence leading to a small private sector and subsequently low investments and a stagnating economic growth.

Let’s now shift focus and look at this issue from a public debt to GDP ratio. The IMF institutionalized a Debt Sustainability Framework (DSF) which is a measure that determines debt thresholds based on the quality and strength of the institutions of a country. For countries with strong institutions, the debt to GDP ratio is supposed to be 50%, those with medium institutions 40% and those with poor institutions their debt to GDP ratio should be 30%. Our debt to GDP ratio currently stands at 49.8%. Despite our Constitution setting a strong foundation for strong institutions, the current leadership makes our institutions to be classified in between poor and medium along the continuum.

But by keenly observing the following data which outlines the debt to GDP ratio of several countries then we can question and forthwith discard the DSF framework of the IMF. USA 102.98%, China 41.06%, Germany 74.7%, France 95%, Japan 227%, South Korea 35.98%, United Kingdom 89.4%, Italy 132.3%, Brazil 58.91%, Greece 177.2%. In Africa, Nigeria has 10.5%, Ghana 67.6%, South Africa 39%, Botswana 23.1%, Burundi 28.3%, Ethiopia 28.6%, Libya 6.1%, Egypt 90.5%, Rwanda 28%, Tanzania 39.9%, Uganda 34.7%, Zimbabwe 77%.

From the figures, we can observe that lower debt to GDP ratio doesn’t imply a surge in economic development and vice versa except for exceptional situations. What matters are three issues: the effectiveness of debt management practices, how much revenue is collected to finance the development projects and the size of budgetary deficits. Taking a look at Kenya, for instance, in 2000 our debt to GDP ratio was 78% and in 2006 at 58%. For year 2000, the 78% can be attributed to a stagnated growth in GDP and poor debt management occasioned by profligacy of resources that was at its apogee during the Kanu regime. As for 2006, the Kibaki regime had a sound public debt management mechanism and the budgetary deficits were very small and relatively large tax revenue deficits were unheard of. 

The following need to be enacted in order to arrest the situation in the short, medium and long term: the government should do away with overambitious budgets that are characterized by huge deficits, freezing further commissioning of new capital projects other than the on-going ones and fight corruption. All in all, I doubt the capacity of the current government to take the aforementioned actions if past events are to go by. This is a time that calls for financial prudence and efficacy in economic governance otherwise, tough economic times are in the offing. In fact, this week on Thursday the economic forecasts by the World Bank for Kenya were reduced from 6% to 5.4% for 2015 and from 6.6% to 5.7% for 2016. Think about tough economic times ahead.

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