Did Kenya spend all borrowed money on development as Kenyatta said? Not quite

Kenya’s President Uhuru Kenyatta, while describing his government as a responsible borrower, said that any debt the country incurred had not been used to pay bills but to develop Kenya. Does the data bear him out?

Kenya’s increased borrowing has been a national talking point in recent months, with some analysts saying the growing public debt could become unsustainable.

Data from the Central Bank of Kenya shows the country’s public debt has more than doubled since 2013 when the current administration took office, to reach the current 54.8% of GDP.

But while acknowledging the expansion in borrowing, President Uhuru Kenyatta said that the only cause for concern was if the money was “being used and utilised for consumption or for recurrent expenditure”.

“As a government and as a responsible government, we are borrowing for investment, in order to create growth in future and thereafter create opportunities and jobs,” he said.

Kenyatta was speaking at the launch of a portal in April to showcase his administration’s achievements ahead of the general election in August.

Kenyan law provides that “national government’s borrowings shall be used only for the purpose of financing development expenditure and not for recurrent expenditure”. (Note: Recurrent expenditure includes salaries, operations and repairs, travel, utilities, hospitality and office stationery.)

With the country experiencing unexpected hardships such as a debilitating drought and its revenue targets falling short even as debt increased, was any borrowed money used to foot regular bills?

Borrowing ‘broadly consistent’ with law

Two days after Kenyatta’s statements, the World Bank released a report on the state of Kenya’s economy. In its Kenya Economic Update, the bank said that at 7.5% of gross domestic product, overall borrowing in the financial year 2015/16 had exceeded development spending, which came in at 7.4% of GDP.

This, it said, suggested that “a small part of the borrowing financed part of the recurrent spending, a departure from the fiscal responsibility principles set out in the Public Finance Management Act”.

The data informing the World Bank’s view was obtained from the Kenya government’s Budget Policy Statement released in November 2016, a bank spokesman, Vera Rosaeur, told Africa Check.

According to the statement, Kenya’s nominal GDP for the 2015/16 financial year was KSh6.59 trillion (US$63.74 billion). The difference between the recorded borrowing and development spending works out to KSh6.7 billion (US$64.85 million).  

Rosaeur said that in its report, the bank indicated that this deviation would correct in the current financial year (which ends in June 2017), with development spending again outstripping the fiscal deficit.

“It is therefore our view that borrowing was broadly consistent with fiscal responsibility principles,” she said. (Note: Africa Check’s review of National Treasury data shows this was the first time such a deviation had occurred under Kenyatta’s government. See table below.)

Financial year Development expenditure & net lending Fiscal balance (incl. grants)
2013/14 KSh428.7 billion -Ksh372.3 billion
2014/15 KSh510.7 billion -Ksh487.2 billion
2015/16 Ksh485.4 billion -Ksh492.1 billion

SOURCE: NATIONAL TREASURY

Akin to taking a bank loan to go on holiday

Kwame Owino, the chief executive of think tank Institute of Economic Affairs (Kenya), concurred with the World Bank.

“Once the fiscal balance [deficit] is bigger [than development expenditure], it means that some money that was borrowed was used for recurrent spending,” he told Africa Check. “So the World Bank is correct.”

Using borrowed funds on recurrent expenditure was akin to “taking a bank loan and using the money to go on holiday”, James Shikwati, the executive director of think-tank Inter Region Economic Network, told Africa Check.

“That means, it doesn’t create a momentum for the economy to generate new money.”

A man waves a red flag during the launch of the first batch of Standard Gauge Railway freight locomotives at Mombasa Port, Kenya, on January 11, 2017. The locomotives are expected to boost the capacity of Kenya's railway transportation, assisting in the realization of Kenya's economic development goals. The SGR system, the biggest infrastructure project in Kenya since independence is being built by the state-owned China Road and Bridge Corporation (CRBC). / AFP PHOTO / ANDREW NGEA
A man waves a flag during the launch of freight locomotives for Kenya’s new railway at Mombasa Port, Kenya, on January 11, 2017. Photo: AFP/ Andrew Ngea

Are there any consequences of borrowing to finance recurrent expenditure? We asked Razia Khan, Standard Chartered Bank’s chief economist for Africa, if temporarily borrowing for recurrent expenditure was a big deal.

“No, especially if they had counted on higher revenue coming in, but that didn’t happen – and so inadvertently some of the borrowing was to finance recurrent spending,” she said.

Despite Kenyan law providing for punitive measures for officials going against national debt guidelines, Africa Check was unable to find evidence that this has ever been done.

The bigger threat for Kenya is its slipping revenue-to-GDP ratio, Khan said. “Along with public sector pay hikes, this could force Kenya into a situation where borrowing to fund recurrent spending becomes the norm”, she said, though it isn’t yet. “This would be a problem, given already elevated-debt levels.

‘Might signal Kenya not playing by governance rules’

Economic historian Morten Jerven, who focuses on development studies at the Norwegian University of Life Sciences, told Africa Check that if this continued to happen, the cost of borrowing for Kenya could increase.

“The costs are often born out in third party relationships. The break might signal to other bond issuers, investors and so forth that Kenya is not playing by the good economic governance rules. That might hurt in terms of higher prices and lower supply in capital over all.”

The reaction by international lenders such as the World Bank and the International Monetary Fund would depend on whether Kenya had a funded programme with strict benchmarks, Khan said.

The IMF has short-term borrowing arrangements with Kenya, with fewer rules than what is called an extended credit facility. “So the IMF couldn’t really say anything meaningful about the slippage, except to note that it happened,” Khan said.    

Jerven said that history has shown that lenders had not been able to consistently exact punishment for countries that fall afoul of borrowing rules, citing Greece and Argentina.

Conclusion: In FY2015/16, Kenya spent borrowed money on regular bills

Defending his government’s rising debt, Kenya’s President Uhuru Kenyatta said that his administration was borrowing responsibly to pay for development and not to foot regular bills.

A World Bank review of the country’s economy found that overall borrowing in the financial year 2015/16 was more than development spending. Our calculations showed this was by KSh6.7 billion.

Some of this money could have been used on recurrent expenditure, against the government’s own rules, the bank said, and against the administration’s stated observance of these guidelines.

We therefore rule President Kenyatta’s claim as incorrect.

The World Bank says it expects the deviation to correct this year. Independent analysts however cautioned if the slippage became a trend as it would make balancing the government’s books more difficult.

Edited by Lee Mwiti  

 

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