The-Accountant-July-Aug-2018

Economy
WHICH WAY FOR
DEBT RIDDEN KENYA?
Down grade of rating leads to expensive
loans and high interest rates
By CPA Kibet Leonard
In September 2014,
Kenya was elevated
to Lower Middle
Income economy
and was the ninthlargest
economy in Africa
with gross national income
(GNI) per capita, $1,160,
surpassing the World Bank
threshold of $1,036. As per
Vision 2030 Secretariat
the Country is aiming to
be a newly industrializing,
middle-income country
providing a high quality
of life to all its citizens by
2030 in a clean and secure
environment. The question
any economist would ask
is whether we are on the
right track?
First forward to 2018,
the country is bedeviled
with huge debt of Ksh 4.5
trillion equivalent to 50%
of the Country’s GDP
whereas as per IMF the
recommended ratio is 40%
for developing economies.
In finance, debt to GDP
ratio measures the financial
leverage, and in a wider sense a country’s
financial health which is the extent to
which a country can meet the cost of
internal expenditure. Though it may be
rightfully argued that the debts were used
for capital expenditure such as the SGR
and the LAPSSET Corridor project
hence spurring economic growth, it won’t
escape our minds that many countries have
been ruined by excessive debt. The effect
of such excessive debt are always felt by
its citizens, through high cost of living as
evidenced by hyperinflation, higher taxes
instituted by the government to meet the
cost of servicing the debt, low circulation
of cash leading to low investment, hence
slow rate of development.
In the early 90’s, and at the height of
inflation occasioned by mega corruption
in the name of Goldenberg and Anglo
leasing, Kenya was advised by the donors
and the World bank to restructure the
civil service. The restructuring resulted
into so many casualties
of employees who
suddenly became jobless
and hopeless. The effect
of such job losses was
felt for a long time
given the nature of
Kenyan Culture where
employees have so many
dependents. Such is the
fate that will befall the
citizens of a country
when the Government is
so indebted to the extent
that it can no longer
finance its own internal
operations and that the
only option available is
to reduce its wage bill.
There have been calls
recently by the salaries
and remuneration
commission of the need
to reduce the wage bill;
a classic case of history
repeating itself.
The effect of such
a huge debt has also
been witnessed by
Moody’s downgrade of
Government of Kenya’s
issuer rating to B2 citing erosion of fiscal
metrics and rising liquidity risks. Such a
down grade of rating will lead to expensive
loans, leading to high interest rates, which
ultimately will upset the fiscal measures
put in place by the Government. That
said, the Government of the day should
perform a balancing act, and reach an
equilibrium position by ensuring the level
of debt is not harmful but beneficial in the
long run.
24 JULY - AUGUST 2018