The Cabinet has passed a resolution allowing President William Ruto’s administration to increase the country’s national debt. That means the Kenya Kwanza government can raise the debt ceiling from the current Sh10 trillion approved by Parliament.

By December, Kenya’s total debt stood at Sh9.6 trillion, which was only Sh400 million shy of the borrowing ceiling set by legislators. This effectively meant that the Ruto administration, which came to power after the August election, has had little headroom to borrow for either development or recurrent expenditure. This came against a background of increased allocation to debt repayment, which consumes about 60 per cent of all revenues collected by the taxman.

Although the Kenya Revenue Authority (KRA) has been raising more in taxes in the last two quarters ending December 2022, the government has piled pressure on the agency to widen the tax bracket.

Only yesterday, the KRA board chair, Anthony Mwaura, revoked all tax reliefs in a press release shared on Twitter.

KRA, he said, in concurrence with the National Treasury and Economic Planning ministry, “has suspended all tax relief payments with effect from 28th February 2023 until further notice”.

This is likely to hurt all workers who enjoy tax reliefs, including those based on household sizes, owner-occupier reliefs for private sector employees with mortgages, motor vehicle import taxes for people with disabilities and those returning to Kenya after working abroad, and all other reliefs that businesses and individuals had been entitled to until yesterday.

According to KRA, over the last five years, it had given tax reliefs worth Sh610 billion, meaning that every year, companies and individuals benefit from an average of Sh1.22 billion in unpaid taxes.

The twin decisions to basically increase taxes (by effectively removing the reliefs) and raising the debt ceiling are likely to conspire to further raise the cost of living for Kenyan workers, business owners and their families since it will lead to a direct reduction in personal incomes against the background of an increase in the national debt.

With a population of 48 million, and a public debt of Sh10 trillion, this effectively means that every Kenyan — man, woman and child — currently carries a proportionate debt burden equivalent to Sh298,000, compared to Sh38,000 in 1998 when Daniel arap Moi was President and when Kenya’s debt stood at the time’s equivalent of about $5.5 billion. This later increased to $24 billion in 2013 at the end of the then President Mwai Kibaki’s tenure. By November last year, the debt had grown to $72 billion.

Yesterday, the Cabinet proposed that national debt be moved from being a specific figure — Sh10 trillion — to a percentage of the national wealth, also known as Gross Domestic Product (GDP).

GDP measures a country’s productivity. In Kenya, for instance, agriculture is the biggest contributor to national wealth, followed by industries and service sector, which includes tourism.  By the end of last year, Kenya’s wealth stood at $264 billion. With the shilling exchanging at about Sh127 to the dollar, that means Kenya’s GDP was Sh33.5 trillion.

“Cabinet approved the transmittal to Parliament of the legislative proposals replacing the nominal debt ceiling of Sh10 trillion with a debt anchor set at 55 percent of GDP in present value terms,” a dispatch from the Cabinet said last evening.

If Parliament passes the proposal, this will give the Ruto administration headroom to borrow upto Sh7 trillion more under the current economic circumstances, which would bring the public debt to Sh17 trillion. With a clear majority in the National Assembly, and with the backing of relevant House committees, such as the powerful Budget and Appropriations Committee led by Kiharu MP Ndindi Nyoro, such a proposal is likely to sail through Parliament with ease.

This also means that if Kenya’s GDP grows, then the government can borrow more, provided it does not exceed the 55 per cent of GDP provision. In 2013, at the end of the Kibaki administration, national debt stood at 39.7 per cent of GDP. This increased to stand at 69.3 per cent of GDP last year. According to the Quarterly Economic and Budgetary Review Report, Kenya’s public debt for financial year 2021/2022 stood at Sh8.6 trillion, an 11.5 per cent increase compared to Sh7.7 trillion in June 2021.

Over the period, the country’s public debt rose by Sh822.5 billion with both external and domestic debt standing at Sh4.3 trillion each. While Kenya’s external debt (in dollar terms) reduced by five per cent from $37.1 million in June 2021 to $35.3 million a year later, the external debt actually increased by Sh156 billion in terms of Kenya shillings due to a weakening of the Kenya currency, which continues to take a hit from a strengthening dollar. 

Country status

The shilling has declined in value from 107.85 units to the dollar by June 2021 to 117.83 units as of June last year, a 9.3 per cent drop. It is now trading at about 126.7 to the dollar this week.

By the end of June 2022, the total cumulative debt service payments to external creditors amounted to Sh305.3 billion. This means that Sh184.5 billion (or 60.4 per cent of the money) was used to pay the principal amount while another Sh120.8 billion (or 39.6 per cent) was used to service the interest on the loans.

Being a lower middle-income country, Kenya has limited access to concessional loans, hence is often forced to seek commercial loans, which are more expensive. Concessional loans are usually given to poor countries, a category that Kenya left when it rebased its economy in 2014. By so doing, Kenya increased its wealth by 25 per cent, effectively removing it from the list of poor countries. 

In June last year, Parliament voted to raise the public debt ceiling to Sh10 trillion to allow the next government to borrow Sh846 billion to plug a Budget deficit in the current financial year, which started on July 1, and which will end in June.

The then Leader of Majority in Parliament, Amos Kimunya, told the House that Kenya was in a situation where it could not do the 2022/23 budget without raising the debt ceiling.  “The administration coming in on August 9 should come back to this House and ensure our borrowing is at a percentage of GDP,” Kimunya said at the time.

In April, the Treasury proposed to cap public debt at 55 per cent of Gross Domestic Product. These are the two twin proposals that the Cabinet ratified yesterday and intends to take to Parliament for approval.

However, it is important to note that all candidates who were seeking the presidency last year promised to tame the ballooning public debt if elected. Now, the Kenya Kwanza administration has signaled its intention to borrow more while also removing all tax reliefs for workers and businesses, all in the same day.