Samson Tizazu G.’s Post

#thegreatreckoning the world awash in government, business and household debt "Kenyan President William Ruto said he would withdraw a proposed law on tax increases after nationwide protests against them turned deadly. We spoke to WSJ's Africa Bureau Chief Gabriele Steinhauser and reporter Nicholas Bariyo about how the country and several of its sub-Saharan neighbors ended up with so much politically charged debt." "Over the past decade, Kenya and many other African nations have borrowed heavily for infrastructure improvements on roads, railways, power plants and telecommunications—and to plug gaps in their budgets. Many did so by moving from cheaper sources of funding, like the World Bank, to more expensive lenders from China or by selling bonds to investors, which came with fewer conditions on transparency and fiscal management." "Kenya’s public debt has doubled to nearly 71% of gross domestic product since 2014, exacerbated by the coronavirus pandemic, when lockdowns and the global slowdown in trade prompted the country’s GDP to contract for the first time since 1993. Despite the growing burden on taxpayers—Kenya now spends 61% of tax revenue on debt service—Kenyan officials have pointed to the drawn-out debt restructurings faced by countries like Zambia and Ghana as reasons for why the government has chosen to keep paying its creditors rather than default."

INFOGRAPHIC: Last week, East Africa’s Finance Ministers tabled a raft of measures for expanded expenditure plans for the 2024/2025 fiscal year with a keen eye on debt repayment and reliance on domestic revenues to run government operations. These measures effectively set the stage for increased taxation, potentially choking economic growth in the region. Below are a few snippets from the headlines of the respective budget speeches. Kenya's 2024/25 budget aims to tackle the country's debt while protecting its fragile economic recovery. According to the line ministry's budget speech, growth is estimated at 5.5% in 2024 and 2025. Kenya’s total fiscal year 2024/35 spending is $31.1bn. To finance the budget, Kenya aims to borrow from external sources. Uganda hopes to limit rising debt by focusing on concessional borrowing and curbing commercial loans next fiscal year. Public debt has been mounting as the government splurges on big infrastructure projects, prompting warnings from its central bank. Total public debt stood at $24.7 billion at the end of last year. The government plans to spend $19.4bn next fiscal year. Tanzania's budget will rise 11.2% to $18.9bn in the 2024/25 financial year to help the government service its debts. Rwanda plans to increase its overall spending by 11% to $4.43bn in the next financial year starting in July. Burundi's budget will rise 15.9% to $1.5bn in the 2024/25 financial year, mainly because civil servants' salary bonuses are unfreezing. According to the African Development Bank, East Africa’s economic growth is projected to pick up from 3.5 percent in 2023 to 5.1 percent in 2024 and 5.7 percent in 2025, buoyed by infrastructure development and increased regional trade.

Here is a snippet of the EAC country's budgets as seen by Business Insights Africa!

"Business interest group Sakeliga says South Africa's latest round of data shows that the country is in deep financial distress – a situation that is almost always followed by state failure. Government finances have deteriorated sharply in 2023 as tax receipts have fallen further behind the pace of spending. "Government borrowing has now swelled to around R100 billion per quarter, from an already-imprudent R50 billion per quarter just a year ago," the group said. Sakeliga noted that the government has run up so much debt since 2008 that interest payments to service its overall debt have spiralled up to nearly R100 billion per quarter as well. Meanwhile, other state and government entities such as large state-owned enterprises and municipalities have since 2008 racked up hundreds of billions in new debts, with a rising expectation that these debts will be guaranteed or bailed out by the national government. Therefore, actual and probable liabilities of the national government have soared in the past 15 years while infrastructure investment has been either neglected or wasteful, and economic value added has stagnated. "The result is that South African government bonds are less trustworthy than they once were. Lenders require higher interest rates as compensation for taking the (rising) risk of lending to the South African government," it said."

In the fiscal year ending June 2024, Kenya's ordinary tax revenue growth of 9.5% from the previous year brought in KSh 2.223 trillion. However, the escalating debt crisis paints a grim picture, with debt servicing expected to consume about 80% of the previous year's tax revenues, amounting to KSh 1.8 trillion. Interest expenses alone are projected to take up 45% of these revenues, signaling a deep financial strain as the country spends a substantial portion of its income on debt obligations. The situation has prompted Moody's to downgrade Kenya's credit rating to Caa1 from B3, positioning it deeper into junk territory. This downgrade reflects heightened risks of default and complicates future debt issuances, which will likely face higher interest rates due to perceived increased risk. The agency's negative outlook stems from the government's failure to pass the Finance Bill 2024, which is crucial for fiscal consolidation and managing debt levels effectively. Economists and financial analysts warn of an impending economic collapse if stringent measures are not taken. Proposed solutions include balancing the budget, cutting expenditures significantly, eradicating corruption, and prioritizing developmental spending. The government is also advised to restructure domestic debt to reduce interest expenditures, which could save 30% to 50% in costs. Without these tough, immediate actions, Kenya faces dire economic consequences and potential civil unrest.

Taxpayers suffers when there's an increase in Government Borrowings. Let's see what's happening in Kenya. - Kenya's total debt surpasses Ksh10 trillion ($69.3 billion) in June 2023. - Foreign borrowing increases to 53.51% of total debt, driven partly by the devaluation of the Kenyan shilling. - Multilateral organisations like the IMF and World Bank are crucial in financing Kenya's budget. Let me bring it down. If a country borrow money, how do you expect the country to repay? Broadly speaking, just three ways. Firstly, if the borrowed money is invested, income generated from such investment. Secondly, other sources of revenue eg exports or oil sales. And lastly, taxation. If there's no other means of repayment, the government may increase its taxes or become more aggressive in its collection. What can be called the fourth option is the printing of money which is deadly and could cripple an economy. Now you've seen why borrowed money should be judiciously used? As a result of increased borrowing during President Willam Ruto's first year in office, Kenya's total debt has surpassed Ksh10 trillion ($68 billion), putting More repayment responsibilities on the taxpayer. Kenya's governmental debt is divided, with Ksh5.452 trillion ($37.1 billion) going to foreign borrowing and Ksh4.736 trillion ($32.2 billion) going to domestic borrowing. Foreign loans account for 53.51 per cent of total debt, while domestic borrowing accounts for 46.48 per cent. Foreign loans have increased since reaching a low of 50.01 per cent in June 2022, while domestic borrowing has slowed down from a high of 49.98 per cent over the same time. Not a rocket science, taxpayers will feel it. Any borrowed funds that is not well managed now will be paid by the future taxpayers of such nation. Disclaimer: Opinions are mine and not a representation of related entities or organizations

William Ruto will have a tough time running the country even if he wins a second term. This is because Kenya has six Euro Bonds worth 7 billion US dollars that will be maturing in the following years. 2024, 2027, 2028, 2032, 2034, and 2048. In the next 10 years we will have to pay 5 Billion US dollars to our debtors. The government will have to increase taxes to the common Mwanainchi to be able to fund both development and recurrent expenditure and still service debt. Its important to note that all these bonds were taken by Uhuru's Government. In his last term Uhuru took five Eurobonds worth 4.1 billion US dollars, digging us deeper into a debt hole. Our debt hole can be attributed to our extended structure of government enacted by the 2010 constitution. Kenya increased the number of government offices and government officials which drove up our recurrent expenditure leaving little money available for development. This meant the government had to seek out debt to fund its own development expenditure. It is however unsustainable to grow and economy through debt funded government spending. Now the current regime has to massively increase taxes to raise enough money to fund its expenditure and service its debt. Kenyans must brace themselves for the tough times. The one option the citizens of Kenya are yet to explore is shrinking the size of their government, especially county government. The main target being cutting down the recurrent expenditure and the wastage in the 47 county governments.

THE TRILEMMA OF KENYA'S NATIONAL BUDGET There was a very interesting interview of Treasury Cabinet Secretary Prof. Njuguna Ndungu just before he went to read this year's budget. In his responses to journalists he raised the important aspect of Kenya's Trilemma in it's budgetary making process. By Trilemma, he meant that there are three key areas of concern when coming up with an appropriate budget of the country. These are government expenditure, debt and revenue mobilization. Government expenditure boosts the economy by pumping money to the market while also providing needed service to citizens such as healthcare and education. The government is mostly the largest spender in the country. Much as you want to spend large to boost the economy and provide service to citizens, you can only spend within certain healthy limits that would not require punitive action on the revenue mobilization. Revenue mobilization is how government raises the money it needs in order to fund its activities listed in the expenditure side. This is mostly done through Taxes on goods or services used by citizens in the country. The more the expenditure then the more revenue mobilization is needed. Whenever the government expenditure outweighs what has come in through revenue mobilization, that is called a deficit. The deficit can be reduced or eliminated by reducing expenditure. the remaining deficit if any will have to be filled by taking debt either locally or internationally. When debt is acquired, it plays a significant role in future budgets because it has to be repaid with interest. So in considering this year's budget, one has to look at what debt requires to be paid and it will therefore be part of government expenditure. The higher the debt then the bigger the chunk that will be taken from money raised through revenue mobilization hence leaving little for expenditure in government activities. That is how Budget making then becomes a Trilemma of balancing between expenditure of government, revenue mobilization and taking/payment of debt.

Early May,2023, the executive board of the IMF approved a three - billion-dollar, three-year loan program for Ghana, allowing for an immediate disbursement of about $600 million and a potential path out for the country. The timely debt restructuring agreements with external creditors according to IMF was essential to successfully implement the Extended Credit Facility loan aimed at helping Ghana overcome immediate policy and financing challenges. Here are some of ten (10) conditionalities attached to the $3 billion bailout agreement: 1. Reducing Customs exemptions 2. Removal of Value Added Tax (Vat). 3. Phasing out tax holidays and exemptions and the Reformation of the Corporate Income Tax (CIT) 4. Automatic adjustment of fuel levies 5. Quarterly tariff adjustment of electricity and water. 6. Increasing progressivity in personal income taxes – income taxes will be going up. 7. Government to employ only 0.5 per cent of the current labour force. 8. Limited salaryy increase of public sector workers by government. 9. Domestic Debt Restructuring II 10. Government to achieve a tax-to-GDP ratio of 18 per cent before the end of the three - year loan agreement. Beyond the fear of job losses, freezes on public sector employment, and minimal wage increments usually associated with such loans, this $ 3 billion IMF deal with Ghana is predicated on extensive requirements that include harsh ‘haircuts’ on investments imposed on Ghanaians to guarantee its successful implementation.

𝐊𝐞𝐧𝐲𝐚'𝐬 𝐑𝐞𝐥𝐢𝐚𝐧𝐜𝐞 𝐨𝐧 𝐁𝐨𝐫𝐫𝐨𝐰𝐢𝐧𝐠 𝐄𝐱𝐩𝐨𝐬𝐞𝐝: 𝐎𝐧𝐞-𝐓𝐡𝐢𝐫𝐝 𝐨𝐟 𝐆𝐨𝐯𝐞𝐫𝐧𝐦����𝐧𝐭 𝐒𝐩𝐞𝐧𝐝𝐢𝐧𝐠 𝐅𝐢𝐧𝐚𝐧𝐜𝐞𝐝 𝐛𝐲 𝐃𝐞𝐛𝐭 A startling revelation from official data shows that for every 100 Kenyan shillings spent by the government over the past five years, 33 shillings came from borrowed funds. This alarming statistic highlights Kenya's growing dependence on debt to finance its annual budget, raising concerns about the sustainability of public debt. According to the National Treasury, between the 2018/19 and 2022/23 financial years, Kenya borrowed Ksh 4.691 trillion to cover budget deficits. During this period, total government expenditures amounted to Ksh 14 trillion. "𝑇ℎ𝑖𝑠 𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 𝑖𝑠 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑡𝑜 𝑎𝑛 𝑒𝑛𝑡𝑖𝑟𝑒 𝑦𝑒𝑎𝑟'𝑠 𝑏𝑢𝑑𝑔𝑒𝑡," 𝑛𝑜𝑡𝑒𝑑 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑠𝑡 𝐷𝑟. 𝐽𝑎𝑛𝑒 𝑀𝑢𝑡ℎ𝑜𝑛𝑖. "𝐼𝑡'𝑠 𝑎 𝑤𝑎𝑘𝑒-𝑢𝑝 𝑐𝑎𝑙𝑙 𝑓𝑜𝑟 𝑜𝑢𝑟 𝑓𝑖𝑠𝑐𝑎𝑙 𝑚𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝑠𝑡𝑟𝑎𝑡𝑒𝑔𝑖𝑒𝑠." The government's borrowing strategy has been diverse, including: Two Eurobond issuances in international markets Medium and long-term benchmark bonds from the domestic market. The COVID-19 pandemic forced Kenya to shift towards cheaper funding sources like The World Bank and International Monetary Fund (IMF), as access to international capital markets became restricted. Kenya currently has three outstanding Eurobonds: Ksh 116.5 billion ($903 million) issued in May 2019, maturing in 2027 Ksh 155.4 billion ($1.2 billion) maturing in 2032 Two Ksh 129.5 billion ($1 billion) bonds maturing in 2028 and 2034 respectively. The government has been part of a multi-year program with the IMF since February 2021 to address balance of payments demands. However, questions remain about the long-term sustainability of this borrowing trend. As Kenya grapples with its debt burden, the coming years will be crucial in determining whether the country can break its cycle of dependency on borrowed funds and chart a path towards greater fiscal independence. 𝑊𝑖𝑡ℎ 𝑜𝑛𝑒-𝑡ℎ𝑖𝑟𝑑 𝑜𝑓 𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑠𝑝𝑒𝑛𝑑𝑖𝑛𝑔 𝑐𝑜𝑚𝑖𝑛𝑔 𝑓𝑟𝑜𝑚 𝑏𝑜𝑟𝑟𝑜𝑤𝑒𝑑 𝑓𝑢𝑛𝑑𝑠, ℎ𝑜𝑤 𝐾𝑒𝑛𝑦𝑎 𝑐𝑎𝑛 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 𝑖𝑡𝑠 𝑑𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡 𝑛𝑒𝑒𝑑𝑠 𝑤𝑖𝑡ℎ 𝑓𝑖𝑠𝑐𝑎𝑙 𝑟𝑒𝑠𝑝𝑜𝑛𝑠𝑖𝑏𝑖𝑙𝑖𝑡𝑦, 𝑛𝑒𝑒𝑑𝑠 𝑖𝑛𝑛𝑜𝑣𝑎𝑡𝑖𝑣𝑒 𝑠𝑡𝑟𝑎𝑡𝑒𝑔𝑖𝑒𝑠 𝑡ℎ𝑎𝑡 𝑐𝑜𝑢𝑙𝑑 ℎ𝑒𝑙𝑝 𝑟𝑒𝑑𝑢𝑐𝑒 𝑡ℎ𝑖𝑠 𝑟𝑒𝑙𝑖𝑎𝑛𝑐𝑒 𝑜𝑛 𝑑𝑒𝑏𝑡.