Debunked

Kenya’s Debt Trap

by Elvis Moenga
21 July 2021

 

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“Blessed are the young for they shall inherit the national debt.” ~ Herbert Hoover

 

My undergraduate thesis was on how debt, specifically the not-so-well-thought-through external debt kind, places an almost back-breaking repayment burden on future generations. Needless to say, my supervisor, who is part of the pro-debt ideologues, didn’t have a lot of kind words for my findings, arguing that Kenya’s runaway debt was sustainable in the long term. Fast forward to 2020 and Kenya’s national debt stands at 7.2 trillion, approximately 71.2% of the GDP (up from around 51% when I was writing my thesis). Out of this, 51% is external while 49% is internal debt.

 

Down South, copper-rich Zambia defaulted on its debts to Eurobond holders and to China, with a public debt of approximately Ksh 1.2 trillion. This made Zambia the first African country to default on its debt obligation during this Covid-19 season. How did Zambia get here?

 

The Zambian government has borrowed heavily under the pretext of improving infrastructure in the country, which on face value should be commendable. However, the form of debt in question is denominated in US dollars, meaning with many African currencies depreciating against the dollar, governments have to pay more in interest repayments. 

 

Back home in Kenya, simply put, out of all the country owns (this is a summation of the amount of money we all pay when we consume goods and services, plus all the money businesses spend to acquire capital goods and investments, plus government spending and net exports) 71% is technically owed to creditors, as I mentioned earlier.

 

How did we get here?

 

Let’s assume a government is a business. In Kenya, we elect those who serve us in government every 5 years, sending our representatives to the Legislature. Then there’s the Executive, which as the name implies, executes government agenda. The third arm, the Judiciary, is purposed for maintaining sanity by ensuring the other two arms of government stick to the straight and narrow.

 

One big happy family, one would imagine.

 

And so just like in an ordinary family setup, when a breadwinner loses a job, you relocate from the lush neighborhood to a slightly cheaper one, cutting down on expenditure. For governments, the attempt to cut down on expenditure is known as austerity. Yet as Kenya’s financials have deteriorated over the last decade – with President Uhuru Kenyatta admitting that Ksh 2 billion is lost to corruption daily – the government has continued to operate as if it has bottomless pockets, with the Ksh 3.6 trillion budget for the 2021-2022 financial year having an almost Ksh 1 trillion deficit. Further, expenditure of the development budget (financed through foreign debt) has been on mega infrastructure, with some like the Standard Gauge Railway in seeming economic limbo.

 

Would good old aid as envisioned in the Marshall Plan have been a better option than the current forms of debt?

 

The Marshall Plan that never was

 

The whole idea of aid was birthed from the Marshall Plan, a finite 4-year scheme to restore Western Europe following the devastation of World War II. The objective was to rebuild cities and get countries back on track. The plan worked, and a technocrat somewhere decided the model should be replicated across Africa. This seemed like a good idea, until it wasn’t.

 

For some, this was sin tax – colonizers and plunderer giving back a little portion of the loot.

 

African governments received publicized donations, which on the face of it seemed to come with little or no entanglements, freebies which were repeatedly diverted into personal pockets and concomitant rackets. At most, what came as punishment was a slap on the wrist, as the bleeding went on almost unabetted. But whenever the West pulled back the carrot and pulled out the stick, states would feign fiscal obedience, as well as the respect of civil liberties and similar demands. 

 

In the long run, aid became a vicious cycle, coming with strings attached.

 

Proponents of aid argued that it was necessary for enhancing democracy – funding civic and other development programs – which in turn would lead to economic growth. But not everyone shares this utopian view. Contrarians argued that economic growth was the prerequisite for democracy, and not the other way round. It has been a chicken and egg debate, which came first? Economist Dambisa Moyo, she of the Dead Aid fame, argued that the problem with democracy in the African contexts is that the West equates multi-partyism (which has its merits) in and of itself to high quality institutions, which isn’t the case, and which to her illustrates the prevalent warped logic of funding one thing with the hope that it unlocks something else, and other short stories.

 

Those against aid have argued that its weak checks and balances are an open door for the corrupt, it encourages dependency and makes lackluster developing countries to become beggars for life.  

 

Enter concessional loans 

 

But beyond giving handouts to Africa – monies which were squandered indiscriminately in a good number of instances – the West thought teaching Africa and the rest of the developing world to fish was a good idea. And so came concessional loans (loans advanced to countries with little to no interest), so that these countries would utilize the money better considered repayment awaited.

 

It sounded like a good plan – cheap and almost readily available credit – until one read the fine print, where loads of conditionalities reside.

 

Traditionally, conditionalities are 3 pronged. First, the money given is channeled into buying specified goods and services from the donor country. Secondly, the borrower has to agree on a set of economic and political policy interventions imposed by the lender. Finally, the donor selects which sector of the economy the money will be spent in. There is zero room for choice. 

 

Over the years, majority of African countries got hooked on concessional loans like crack.

 

And so unlike the Marshall Plan which was time bound, aid to Africa became perpetual, and so did concessional loans. But seeing that there was still more appetite for money, non-concessional loans from players such as China came into the picture, bringing with them lesser conditionalities but higher interest rates among other lopsided fine-print clauses.

 

Lending as a Business

 

It goes without saying that development institutions and aid agencies are here to stay, and their business is to keep loaning and giving grants. This will carry on despite the fact that loans and grants may not be used for the intended purposes or may have negative implications on the economy. At the same time, African governments will continue insisting on their financial distress in perpetuity, as even those led by autocrats continue to receive loans and grants. And much as national debt in and of itself is not a terrible idea, Kenya and others like her will continue struggling to breathe, until a radical fiscal shift happens, and the younger folk challenge the status quo.


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