When Members of Parliament convene this afternoon to vote on President Uhuru Kenyatta’s proposed austerity and tax measures, they will be choosing from an array of difficult options in a near do or die situation that has been gradually coming in the past five years.
At the centre of it all is a massive Sh870 billion debt service obligation that public finance experts say cannot be met without a significant increase in revenues.
The Sh870 billion debt servicing obligation means the country will spend more than 50 per cent of ordinary revenues – at best Sh1.6 trillion – to pay loans, leaving the rest to meet the huge financial obligations of both the national and county governments.
The revenue estimate is based on the fact that the country collected Sh1.487 trillion in the fiscal year that ended in June.
At 50 per cent, the debt servicing obligation is well over the 30 per cent threshold, putting Kenya in an even more precarious position.
In the financial year that ended in June, Nairobi spent Sh649.4 billion on debt servicing against total revenues of Sh1.487 trillion or 43.7 per cent, a huge increase from the 35.8 per cent the previous fiscal year.
Going back to the international market for new debt is seen as the only way Kenya can meet the looming heavy debt obligations without causing a crisis on the domestic front.
Mr Kenyatta’s quest to institute new revenue raising measures is therefore partly being seen as aimed at convincing potential lenders that Kenya can generate enough money in the future to service its debt obligations.
“With the maturity of debut five-year international sovereign bond in June 2019, we view the government will tap the international markets for a shorter-term Eurobond,” said Genghis Capital, an investment bank based in Nairobi.
Besides, the ongoing dilution of Kenya’s public finances has seen yields on the two Eurobonds rise, some by nearly 200 basis points (two percentage points) year to date.
This signals that the country could pay a much higher price if it went back to international markets for funds.
More recently, the global cost of money has risen in tandem with the US Federal Reserve decision to tighten its monetary stance with an increase of the base rate just before mid-June.
It remains to be seen how MPs will navigate this delicate terrain – on the one hand safeguarding the huge national interest that lies in protecting the integrity of the country’s finances – and reducing the economic pain that the new tax measures will visit upon those they represent.
Introducing new taxes is meant to help move total revenues closer to Treasury secretary Henry Rotich’s target of Sh1.9 trillion, which is required to finance the Sh2.9 trillion budget.
But there is also the drive to make deep spending cuts, which most MPs detest because it includes a cut in Constituency Development Fund (CDF)cash, the money that has become the biggest grassroots political tool and a slush fund for sitting parliamentarians.
The list of tax measures Mr Kenyatta has proposed includes imposition of an eight per cent value added tax on fuel, excise duty on money transfer services, a housing development levy and an increase in tax on kerosene. Economist David Ndii says in an analysis of Kenya’s public finances that the tapping of syndicated loan markets could become necessary and at higher interest rates because the Treasury would be facing an unfavourable market environment and the Eurobond route might not be a realistic option.
Dr Ndii draws attention to the Sh102 billion that the national government had in July, but did not spend even as it disbursed nothing to the counties and for development, arguing the amount has been kept to form part of what is needed to refinance a maturing Sh250 billion debt.
“[T]he Sh102 billion shilling cash hoard — the money that government had but did not spend in July – is half the money that the government raised in the second Eurobond six months ago. It was not spent because it was raised to refinance the maturing debt. The balance has to be raised.”
The Treasury has proposed in the 2018/19 Budget to raise Sh1.949 trillion in revenues, a target that many analysts see as unrealistic given the rate at which revenues have been growing over the years.
In the fiscal year 2017/18, the Treasury realised just over 87 per cent of its projected revenues – meaning Sh1.7 trillion is the realistic amount even with the new tax measures.
“It is a stretch. I don’t think the Treasury can realise such revenues (Sh1.949 trillion). It needs to cut spending and among the places to look for is travel, both foreign and domestic,” said Churchill Ogutu, a research analyst with Genghis Capital.
Mr Ogutu said the Sh42 billion deficit in the first month of the fiscal year (July), if pro-rated for the whole financial year, signals that the Treasury would face a herculean task hitting its state targets.
Besides cutting expenditure, Mr Ogutu reckons the state could scale down spending on the “Big Four” agenda projects, especially that on housing.
“The housing development agenda is a low hanging fruit in terms of what the government can cut from its expenses this fiscal year. But it will need to do more than that and focus on priority projects as well as fiscal discipline,” he said.
World Bank pushes G-20 to extend debt relief to 2021
World Bank Group President David Malpass has urged the Group of 20 rich countries to extend the time frame of the Debt Service Suspension Initiative(DSSI) through the end of 2021, calling it one of the key factors in strengthening global recovery.
“I urge you to extend the time frame of the DSSI through the end of 2021 and commit to giving the initiative as broad a scope as possible,” said Malpass.
He made these remarks at last week’s virtual G20 Finance Ministers and Central Bank Governors Meeting.
The World Bank Chief said the COVID-19 pandemic has triggered the deepest global recession in decades and what may turn out to be one of the most unequal in terms of impact.
People in developing countries are particularly hard hit by capital outflows, declines in remittances, the collapse of informal labor markets, and social safety nets that are much less robust than in the advanced economies.
For the poorest countries, poverty is rising rapidly, median incomes are falling and growth is deeply negative.
Debt burdens, already unsustainable for many countries, are rising to crisis levels.
“The situation in developing countries is increasingly desperate. Time is short. We need to take action quickly on debt suspension, debt reduction, debt resolution mechanisms and debt transparency,” said Malpass.
Kenya’s Central Bank Drafts New Laws to Regulate Non-Bank Digital Loans
The Central Bank of Kenya (CBK) will regulate interest rates charged on mobile loans by digital lending platforms if amendments on the Central bank of Kenya Act pass to law. The amendments will require digital lenders to seek approval from CBK before launching new products or changing interest rates on loans among other charges, just like commercial banks.
“The principal objective of this bill is to amend the Central bank of Kenya Act to regulate the conduct of providers of digital financial products and services,” reads a notice on the bill. “CBK will have an obligation of ensuring that there is fair and non-discriminatory marketplace access to credit.”
According to Business Daily, the legislation will also enable the Central Bank to monitor non-performing loans, capping the limit at not twice the amount of the defaulted loan while protecting consumers from predatory lending by digital loan platforms.
Tighter Reins on Platforms for Mobile Loans
The legislation will boost efforts to protect customers, building upon a previous gazette notice that blocked lenders from blacklisting non-performing loans below Ksh 1000. The CBK also withdrew submissions of unregulated mobile loan platforms into Credit Reference Bureau. The withdrawal came after complaints of misuse over data in the Credit Information Sharing (CIS) System available for lenders.
Last year, Kenya had over 49 platforms providing mobile loans, taking advantage of regulation gaps to charge obscene rates as high as 150% a year. While most platforms allow borrowers to prepay within a month, creditors still pay the full amount plus interest.
Amendments in the CBK Act will help shield consumers from high-interest rates as well as offer transparency on terms of digital loans.
Scope Markets Kenya customers to have instant access to global financial markets
NAIROBI, Kenya, Jul 20 – Clients trading through the Scope Markets Kenya trading platform will get instant access to global financial markets and wider investment options.
This follows the launch of a new Scope Markets app, available on both the Google PlayStore and IOS Apple Store.
The Scope Markets app offers clients over 500 investment opportunities across global financial markets.
The Scope Markets app has a brand new user interface that is very user friendly, following feedback from customers.
The application offers real-time quotes; newsfeeds; research facilities, and a chat feature which enables a customer to make direct contact with the Customer Service Team during trading days (Monday to Friday).
The platform also offers an enhanced client interface including catering for those who trade at night.
The client will get instant access to several asset classes in the global financial markets including; Single Stocks CFDs (US, UK, EU) such as Facebook, Amazon, Apple, Netflix and Google, BP, Carrefour; Indices (Nasdaq, FTSE UK), Metals (Gold, Silver); Currencies (60+ Pairs), Commodities (Oil, Natural Gas).
The launch is part of Scope Markets Kenya strategy of enriching the customer experience while offering clients access to global trading opportunities.
Scope Markets Kenya CEO, Kevin Ng’ang’a observed, “the Sope Markets app is very easy to use especially when executing trades. Customers are at the heart of everything we do. We designed the Scope Markets app with the customer experience in mind as we seek to respond to feedback from our customers.”
He added that enhancing the client experience builds upon the robust trading platform, Meta Trader 5, unveiled in 2019, enabling Scope Markets Kenya to broaden the asset classes available on the trading platform.