Why your taxes are not working for you
There are only two sources where the Government raises the money to pay the police, buy drugs for public hospitals and build roads – you and you alone.
In other words, you are the Government’s cash cow through the taxes you pay in different forms be it Pay As You Earn tax for the salaried workers or from the purchase of different goods and services.
But going by the trend in recent years, it would appear the cow has been milked dry.
“No pain, no gain,” the Government would say, but how much more pain can the taxpayer endure going forward?
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As he prepares to take the time off his busy schedule this festive season, President Uhuru Kenyatta might want to reflect on whether the staggering Sh3.2 trillion debt his Government has racked up over the last six years has bought more fodder for the cow to produce more milk or has left it with nothing.
His critics insist the country is in a crisis. Total public debt hit stratospheric levels of Sh5.1 trillion as of September – almost a three-fold increase from Sh1.9 trillion in March 2013.
And the rate at which creditors have been knocking at Treasury’s door for their money has been alarming, forcing the ministry to put on hold key expenditure on development.
Not only is Kenya’s stock of debt getting more expensive as investors demand higher interest rates, its repayment period is also getting shorter and shorter, piling pressure on Government revenue.
As of June 2015, if the Government borrowed Sh500 billion to plug its budget deficit, it would have incurred an additional Sh12.5 billion as interest. During this period, average interest rate was 2.5 per cent and the repayment period hovered around 20.3 years.
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The same loan two years later would see the Government slapped with an average interest rate of three per cent, with taxpayers parting with Sh15 billion as interest payment.
The extra Sh2.5 billion is what President Uhuru needs to support value addition in manufacturing, one of his Big Four agenda pillars. The higher level of debt and reliance on expensive loans have earned Kenya a place in the top-five club of notorious developing countries that are paying the highest interest on debt, according to the International Monetary Fund (IMF).
Externally, Kenya used to get cheap loans from such multilateral institutions as the World Bank and the IMF, among others. However, since 2015 when Kenya climbed up the income ladder to become a lower middle income country, cheap loans have fizzled out.
This has seen the share of expensive commercial loans from the open market such as the Eurobonds and those arranged by bank syndicates surge.
Internally, creditors who include commercial banks, pension funds and insurance companies, have shown that they are unwilling to let the Government stay with their money for more than a year, a dangerous trend given that the projects the borrowed cash is sunk into will take long to pay off.
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In the financial year that ended in June, for example, 38 per cent of the domestic debt, or Sh792 billion worth of debts that fell due in that period, were short-term debt instruments known as Treasury-Bills (T-bills). The T-bills have a maturity period of less than a year.
This put the Government in a pickle where in less than a year, the domestic debt it was supposed to pay was more than half of the taxes it collected. But like any other smart business person, the Government’s first avenue is to refinance – repay the maturing loans with another loan to get these creditors off its back.
Ideally, this debt should be paid with a cheaper one – one that has long-term tenure and attracts low interest rate.
But with so much debt maturing in less than a year Treasury, in one of its latest debt sustainability reports, has admitted that it is staring at what is known as refinancing risk, where it might find it difficult to borrow to repay the maturing debts.
“Refinancing risk is significant as debt maturing in one year as a percentage of revenue is 54.4 per cent,” notes Treasury in the 2018 report.
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Refinancing needs falling due in the current financial year (FY) is $ 1.8 billion (Sh180 billion), $4.4 billion (Sh440 billion) in FY 2024/25 and $ 2.8 billion in FY 2024/25.
The refinancing needs in the current financial year included the five-year Eurobond which the Government had initially intended to refinance by borrowing from the international market, probably by taking another Eurobond.
However, recent reports have indicated that Treasury will instead borrow from a syndicate of banks to offset the debt. The IMF, which has already warned that Kenya’s debt has veered off the sustainable tangent, has added its voice to the refinancing fiasco. The global lender has encouraged Kenyan authorities to refinance loans at a longer maturity to limit the threat.
But for Treasury, kicking the can down the road by replacing short-term with long-term loans for both internal and external debt will not be all smooth sailing. In the domestic market, investors have already shown an affinity for T-bills.
“The crisis is already here,” says Kwame Owino, chief executive of Institute of Economic Affairs, a public policy think-tank. He insists that the country’s short and medium-term options of managing debt are increasingly constrained.
Proponents of binge-borrowing and Treasury mandarins have, however, been defiant, arguing that the debt is manageable.
Borrowed cash, they reckon, has been put into good use. As such, it is only a matter of time before Kenyans begin enjoying the fruits of some of the projects that have sprung up in various parts of the country courtesy of the borrowed trillions.
“If you are not willing to take the pain, you are not going to achieve faster growth,” says Gerishon Ikiara, an economics lecturer at the University of Nairobi. But as taxpayers pensively wait for the pain to give way to the gain, they have continued to pay for these loans through the nose.
For every Sh100 that they have given to Kenya Revenue Authority (KRA) in taxes, the Government has paid out Sh40 to creditors even as it remains with so little for other needs.
The Sh40 given to creditors as payment on interest or principle means reduced cash for development activities, including building of a new road, schools and supply of drugs in hospitals. For example, in FY 2015/16, the Government forked out Sh417 billion to creditors, an increase of Sh51 billion from the previous financial calendar.
And because debt repayment is part of Consolidated Fund Services (CFS), or non-discretionary expenditure, which also includes pensions, salaries and allowances to constitutional office holders and fees for international treaties, the Government was painfully forced to slash Sh46.8 billion from its development expenditure.
Because debts have to be religiously settled as they fall due, the Government’s has been forced to overstay with suppliers’ cash, Sh30 billion by end of June. Moreover, critical economic sectors have struggled to stay afloat or expand after being starved of credit as Government has snapped up much of the local debt.
Also because the country’s revenue mobilisation has been woefully slow against the jet-speed increase in its debt repayment obligation, it has been forced to redo its budget several times by taking cash away from projects that would contribute to the creation of jobs.
Casualties of the so-called supplementary budget in FY 2015/16 included education, which lost Sh14 billion, agriculture (Sh10 billion), tourism (Sh3.4 billion) and energy, about Sh1 billion.
Indeed, in the last five financial calendars, lack of funds has seen the Government fail to keep its promise of constructing the much-needed houses for the police as it consolidated funds for debt repayment.
Smallholder farmers – the pillar of the agricultural sector, which is the country’s economic mainstay – have not been able to access cheap seeds, fertiliser and other agricultural inputs, with implementing bodies citing lack of funds.
Moreover, the Government is yet to finish installing CCTV cameras around the country to boost security due to budget constraints. The promise to refurbish seven stadia around the country has remained just that, a promise. This as the cash-strapped Government pushes spending on sports and entertainment down into the realms of non-essential items.
There was a deliberate effort by Kenyatta’s predecessor, Mwai Kibaki, to tame the country’s debt appetite, says Owino. By the time he left office in 2013, for every Sh100 that KRA collected, Kibaki paid out only Sh24 to creditors.
Yet, by June 2018, payment to creditors as a fraction of taxes collected in the entire financial year was 51 per cent, hence the refinancing crisis. Out of Sh1.2 trillion the State collected in taxes, creditors gobbled up Sh650 billion.
Both opponents and proponents of Government borrowing trace back the country’s binge-borrowing to an ambitious development blueprint that the country came up with in 2008. Vision 2030 envisages Kenya to become a middle income economy in 12 years, with the economy growing by double digits.
This is why some economists such as Mr Ikiara are against the demonisation of borrowing to grow the national cake. He also reckons that the decision to borrow has been informed by a strong “anti-tax” sentiment among Kenyans. So strong has anti-tax feeling been, he says, that Government has been forced to look for other money-raising ways.
And the borrowed cash, says the don, who had a stint in Government as Transport Permanent Secretary (known as Principal Secretary today), is aimed at stimulating the economy. “Otherwise, the economic size of the economy will reduce,” he explains.
Projects that have been built with borrowed cash have seen the size of the economy – measured by adding up all finished goods and services produced in the country – more than doubled from $35 billion (Sh3.5 trillion) to $75 billion (Sh7.5 trillion) in 10 years, he adds.
This is an indication of an economy that is growing even as employment opportunities and other dynamic activities, which create other sources of revenue, have shrunk.
Even more critical, according to Ikiara, is that the infrastructural projects that the Government has built using the borrowed cash have resulted in what economists call the multiplier effect where investing the Sh100 of borrowed cash spawns another Sh50 or more somewhere else.
He cites the Sh30 billion which Kenya borrowed from China for the construction of Thika Superhighway. As a result of this modern highway, a lot of economic activities have sprung up.
Not only are there more people using the highway than before, but mega projects that will have a significant bump on the country’s GDP such as Tatu City have also been unveiled.
“Tatu City would not have been there if it were not for the Thika Superhighway,” says Ikiara.
His position on the multiplier effect of debt-funded projects, however, is not shared by Mr Owino and Anzetse Were, a development economist.
Arguing that there has been little to show in terms of multiplier effects for most of the projects, Owino describes the Thika Superhighway as an “outlier.”
He rejects the idea that these projects will result in a burst of economic activities as “a straight line theory.”
Were for her part, reckons that the good that would have come out of the projects have been drowned by corruption, with taxpayers paying more than they should for them.
“It is not clear we are getting value for infrastructure projects. We are paying more than we should for these projects, meaning they are inefficient,” she adds. Even Ikiara agrees that graft might be having a corrosive effect on these debt-financed projects.
“We have a problem of corruption. We need to fight impunity and thuggery until we have a situation where every cent that is raised, either through taxes or debts, is used well.”
One of the controversial projects has been the standard gauge railway (SGR) which is estimated to have chalked up close to half a trillion in Chinese debt so far. Critics say the project was over-priced. Others even dismiss it as another white elephant.
Jeff Gable, the chief economist for Absa, says SGR has not lived up to its hype of injecting a 1.5 per cent bump on the growth of the economy.
“Questions are being asked as to whether the project will have the intended benefits,” says Gable.
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