Photograph — Reuters

President William Ruto‘s administration has set its sights on borrowing a staggering Sh3.6 trillion during his first five-year term, turning his previous plan to take it slow on debt on its head. This amount is equivalent to 89% of the record Sh4.1 trillion borrowed by his predecessor, Uhuru Kenyatta, in the five years leading up to June 2022.

But why the sudden change of heart? The answer lies in the government’s “Bottom-Up” economic plan, which aims to channel resources to sectors that can have a significant impact on job creation and wealth generation. This increase in spending has prevented deeper cuts on the country’s borrowing.

As a result, Ruto’s budget will top Sh5.1 trillion in the fiscal year ending June 2027, compared to Kenyatta’s last annual expenditure of Sh3.0 trillion. This increase in expenses is expected to wipe out any additional taxes, as the government has set a target to increase Kenya Revenue Authority (KRA) collections to Sh3.78 trillion in June 2027, up from the current Sh2.19 trillion.

The Treasury had initially targeted borrowing Sh862 billion in the current fiscal year, but the Ruto administration has since cut this target to Sh849 billion and Sh695 billion in the next fiscal year. This move aligns with the Treasury’s call for Kenya to “move from dependence on debt to dependence on revenues raised by taxpayers.”

However, Kenya is at high risk of debt distress, according to the International Monetary Fund (IMF), with a debt-to-GDP ratio of 62.3% as of October. The country’s efforts to ease its debt burden come as several emerging and frontier-market countries review the terms of their loans with lenders.

In December, Fitch Ratings downgraded Kenya’s credit rating to B from B+ due to its high debt and increased borrowing costs, which limit access to global markets. Currently, Kenya spends more than half of its tax revenue on servicing liabilities, putting the country at a high risk of debt distress, according to the IMF.

Treasury data shows that Kenya will cut borrowing for the next three financial years, including the Sh690 billion for the year ending June 2024. However, borrowing is set to surge as Kenya approaches the 2027 General Election, increasing to Sh844 billion in the year ending June 2027, matching levels seen under the Kenyatta administration.

Kenya’s debt has more than quadrupled to Sh8.58 trillion ($71 billion) under Kenyatta, who invested heavily in new rail links and other infrastructure. The public debt rose to Sh8.9 trillion as of November, according to central bank data.

Like other emerging economies, Kenya has struggled to raise funds from international bond markets in 2022 due to a surge in yields. In June, the country was forced to cancel the planned issuance of a Eurobond and is now seeking alternative sources of funding.

The government is betting on raising additional tax revenues and spending rationalization to contain growth in the country’s debt levels over the medium term. “The fiscal policy stance over the medium term aims at supporting the economic recovery agenda of the government through a growth-friendly fiscal consolidation plan designed to slow the annual growth in public debt and implementing an effective liability management strategy without compromising service delivery to citizens,” the Treasury stated.

In conclusion, while the government’s “Bottom-Up” economic plan may have noble intentions, it comes at a cost. Kenya is at high risk of debt distress, and the government’s plans to increase borrowing, despite initial commitments to cut it, may have severe consequences for the country’s financial stability. As always, time will tell.

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