Government of Kenya is broke and cannot pay civil servants salaries. An analysis on foreign loan is hindering Kenya's development

Civil servants, including lawmakers and county government employees, are feeling the pinch as a result of salary delays. Teachers and members of the disciplined forces - police and soldiers - have been among the few civil servants to receive their March pay so far.

According to reports, the government is experiencing a cash-flow crisis, with spending demands failing to meet lower revenue collections by the Kenya Revenue Authority (KRA). In a statement issued on April 7, National Assembly minority leader Opiyo Wandayi decried the situation, criticizing the President William Ruto-led administration for delaying funds disbursement to counties and salary payments.

Counties, on the other hand, have not received funds from the National Treasury for the past four months. Mombasa Governor Abdulswamad Nassir earlier this week claimed devolution was under siege, demanding the funds be disbursed immediately or county operations would be halted.
Wandayi questioned where the savings were going, citing the Kenya Kwanza administration's elimination of fuel and maize flour subsidies, as well as various tax increases. He also questioned the establishment of 50 Chief Administrative Secretaries (CAS).

"We have no idea where the proceeds from taxes and savings from canceled subsidies are going." The obvious conclusion is that the criminals at KRA are collecting and pocketing taxes, just as the inepts at the National Treasury do."

How much Kenya's Monthly Revenue Goes to Salaries and recurrent Expenditures

Counties spent 43% of their revenue on wages, operations, and other personal emoluments in 2020/2021, exceeding the set limit for the second year in a row.

According to the most recent data, they spent Sh190 billion on salaries and other related expenses against a revenue base of Sh440 billion.

The expenditure amounts to an average of 43.2% of total revenue, exceeding the 35% threshold established in the Public Finance Management Act regulations passed by Parliament in 2012.
According to the 2022 Budget Review and Outlook Paper (BROP), only eleven counties met the threshold rule during the review period.

Makueni, Migori, Samburu, Uasin Gishu, and Kilifi counties were among them.

Turkana, Nakuru, Kwale, Isiolo, Mandera, and Tana River were among the others.

According to the report, "the Public Finance Management (County Government) Regulations, 2015 require that expenditure on wages and benefits for public officers not exceed 35% of total revenues."

During the same time period, data released by the Controller of Budget (CoB) Margaret Nyakang'o revealed that county governments fell short of the target in the collection of their own source revenue by Sh24.5 billion, only managing to generate Sh35.9 billion, or 59.4 percent of the projected Sh60.4 billion.

The 2022 BROP, on the other hand, has labeled the target figures as unrealistic.

"County governments are projecting unrealistic figures that must be corrected." The National Treasury must ensure that counties have the resources to do so.

The devolved units' persistent failure to rein in their recurrent budgets has hampered development spending and the settlement of pending bills in an economy that relies heavily on government spending for growth.
The Office of the Auditor General (OAG) reported total bills owed by counties as of June 2020 to be Sh152.6 billion, with Sh45.5 billion classified as eligible (payable) and Sh107 billion classified as ineligible.

By June of this year, county executives had only settled Sh18 billion of the eligible bills and Sh1.6 billion of the ineligible ones, indicating a difficult battle to clear the backlogs.

The accumulation of pending bills has exacerbated cash-flow issues for businesses, particularly Small and Medium Enterprises (SMEs), forcing some of them out of business.

Busia, Garissa, Kilifi, Kisumu, Nairobi City, and Machakos were named by the CoB as the poorest spenders of development billions.

Mombasa, Narok, Nyandarua, Taita Taveta, Turkana, and Vihiga were among the others, with absorption rates of less than 40%.

Only three counties, Mandera, Kakamega, and Marsabit, absorbed more than 70% of development funds, at 74%, 73.4 percent, and 70.8 percent, respectively.

How much Kenya Spent on Loan Repayments from its Monthly Revenue

Kenya spent 55% of tax revenues on debt repayment in the six months to December 2022, highlighting the strain on public coffers.
According to new data from the Controller of Budget (COB), the government spent Sh526 billion between July and December 2022 to pay domestic and external creditors, a massive 32.8 percent or Sh130 billion increase from Sh396 billion in the same period the previous year.

This means that for every Sh100 collected by the Kenya Revenue Authority (KRA) during the period, an average of Sh55 was used to service domestic and foreign debt.

The proportion of tax receipts consumed by debt servicing costs in the six months to December 2022 is higher than the average 45 percent used in the same period in 2021.

According to COB data, KRA collected Sh952.6 billion between July and December 2022, with the total public debt service amount accounting for 55% of that total (Sh526 billion).

In 2021, the taxman collected Sh868.8 billion in taxes, while the government spent Sh396 billion on debt service.

This means that, while taxes increased by 9.6 percent between the two periods, debt service costs increased at a rate more than three times that of taxes—32.8 percent.

Debt service rising
Increases in debt service costs average more than Sh21.6 billion in additional monthly spending on public debt service between July and December 2022, despite the Treasury's warning last month of growing debt pressure as many domestic and external instruments are expected to mature over the next three years.

According to the COB report on national government budget implementation for the first half of 2022/23, while the exchequer issued Sh503.8 billion to the public debt account at the Consolidated Fund Services (CFS), total public debt expenditure was Sh526.02 billion.

How Foreign Loans Affect Kenyan Development

Foreign loans have both positive and negative effects on the economic development of African countries, including Kenya. While loans can provide financial support for infrastructure development, they can also lead to economic dependency, corruption, and the mismanagement of public resources. In this case study, we will explore how foreign loans have impacted Kenya's development and the challenges they face in paying off their debt.

Kenya is one of the most indebted countries in sub-Saharan Africa, with a public debt-to-GDP ratio of 70% as of 2021. The country has been borrowing heavily from foreign lenders such as China, the World Bank, and the International Monetary Fund (IMF) to finance its infrastructure development projects, including roads, ports, and power plants. However, this rapid borrowing has come at a cost, as Kenya now faces a significant debt burden that has hampered its economic growth.

One of the main challenges of foreign loans is their high interest rates, which can lead to unsustainable debt levels. For example, China has been one of the largest lenders to Kenya, providing over $9 billion in loans for infrastructure projects such as the Standard Gauge Railway (SGR). However, the terms of these loans have been criticized for their high interest rates and lack of transparency, leading to concerns about debt sustainability and the potential for debt traps.

Another challenge is the mismanagement of funds and corruption. Foreign loans are often tied to specific projects, but poor governance and corruption can lead to misappropriation of funds, resulting in incomplete or poorly executed projects. This not only wastes public resources but also reduces the economic benefits that these projects could provide.

Furthermore, foreign loans can lead to a dependence on external funding, which hampers the development of local industries and entrepreneurship. This is because foreign loans are often used to finance infrastructure projects that are executed by foreign companies, which may not provide sufficient opportunities for local businesses to participate in the projects. This limits the transfer of skills and knowledge to local industries, making it difficult for them to compete in the global market.

In addition to these challenges, Kenya faces a significant debt burden that has hampered its economic growth. The country's debt repayments are estimated to consume about 60% of its annual revenue, leaving little room for other public expenditures. This has led to austerity measures, such as cuts in public spending, which can undermine social welfare programs and exacerbate poverty levels.

To address these challenges, the Kenyan government has taken several steps, including negotiating with lenders for better loan terms and increasing transparency in borrowing and debt management. The government has also launched initiatives to promote local entrepreneurship and industries, such as the "Buy Kenya, Build Kenya" campaign, which aims to promote local products and services.

In conclusion, foreign loans can have both positive and negative impacts on the development of African countries like Kenya. While loans can provide financial support for infrastructure development, they can also lead to unsustainable debt levels, corruption, and economic dependency. Therefore, it is essential for African governments to negotiate for better loan terms, increase transparency in borrowing and debt management, and promote local entrepreneurship and industries to minimize the negative impacts of foreign loans on their economic development.