Kenya has been implementing massive infrastructure projects aimed at social and economic transformation desired in its development blueprint: The vision 2013. Due to persistent expenditure revenue gap over the years, the stock of debt has grown exponentially in the last five years and the government resorted to borrowing to finance the deficits. There is growing concern that increased demand for resources for debt service may have adverse effects in the economy including but not limited to reduction in social spending, introduction of new taxes, increased rates for existing taxes, increased costs of borrowing to the private sector, and rising costs of production leading to higher prices for goods and services with negative impacts on household overall consumption. In such cases, the low-income households bear the greatest burden because of their low purchasing power and high dependency on the basic public services for wellbeing
The growing concern on the effects of the spiraling level of public debt and specifically the impact of its servicing on social spending and well-being of low-income households in Kenya motivated Oxfam to commission a study to provide empirical evidence on the same based on experiences in two selected counties – Nairobi and Mombasa. The specific objectives sought to establish the correlation between debt servicing and social spending; establish the impact of changes in social spending on low income households; assess the trends in investment of the loan-driven infrastructural development on socio-economic development from 2015 to 2020; determine the opportunity costs of debt financing to social and economic prosperity of low-income citizens and to analyse the level of Citizen Participation in the debt cycle. The study findings provide a knowledge base upon which policies and advocacy messages linking debt service to the socio-economic outcomes for low income households can be formulated
The study adopted a mixed methods approach in which both secondary and primary data were used. Secondary data on debt stock and repayments, expenditures by the national government on education, health and social protection were extracted from various issues of statistical abstracts of the Kenya National Bureau of Statistics (KNBS). Data on budget allocations and actual expenditures by the Nairobi City and Mombasa Counties on health, education, water and Sanitation were obtained from the Controller of Budget (COB) reports. Primary data was collected from a sample of 387 households comprising 201 households from Mukuru (Kwa Reuben, Kayaba, and Viwandani) in Nairobi and 186 households from Mombasa’s Bangladesh and Kalahari slums.
On the correlation between debt service and social spending in Kenya the following conclusions are made:
The negative correlation between debt service and expenditures in the two keys social sectors show that debt service crowded out social spending. The proportion of debt service in total ordinary revenue grew from 23.97 percent 2011/2012 to a high of 49.82 percent in 2018/2019. Similarly, the proportion of debt service in national government spending increased exponentially from 2015 to 2020 remaining high above the proportion of spending on education and health which depicted a gradual downward trend.
Accumulation of large stock of debt acts as an indirect fiscal instrument for transferring wealth from poor taxpayers to government bondholders. The interest component of debt service grew at an increasing rate and remained higher above total spending on social protection programmes across the years. The social protection programmmes in Kenya are mainly financed by development partners. The increasing growth in total interest on debt therefore benefit government bondholders at the expense of poor taxpayers
The reduction in spending in social sectors is manifested in lack of essential services in health and education facilities. Survey respondents indicated lack of medicines and specialized equipment in most of the hospitals at level three and below where they are to access free treatment. Requirements to provide most of the resources for learning in public schools, delays in government disbursements of capitations to schools as well as payments for social protection transfers and public works programmes were cited as indicators of lack of adequate resources to sustain social services
On the Impact of changes in social spending on low income households:
Trends in the recurrent and Development Spending by the county governments of Nairobi and Mombasa on health and Education are not consistent with rising demand for services. Fluctuations in spending and declining development expenditures far below budgetary allocations depict uncertainty in realizing expansion required in facilities to enhance access to quality services
Insufficient funding of the public health and education facilities has negatively impacted the quality of services to citizens. Congestion in classrooms, few schools and few teachers to handle very many students, lack of water and good sanitation facilities as well as requirements to pay for services have caused ineffective learning from public education institutions. Lack of medicine, inadequate medical laboratory services, long queues, few qualified staff in public health facilities that are meant to offer free services have denied many low-income households’ access to quality healthcare
The delays in remitting Cash transfers to the vulnerable populations (old persons, orphans and vulnerable children) cause inconveniences to beneficiaries. Further lack of updating beneficiaries register and lack of clear criteria for awarding bursaries to students has left some of the most vulnerable groups out of the government support programmes Many students from low income households have dropped out of school because they are often sent home for fee and other required resources. Some of the very needy students get bursaries to join form one but drop out after failing to get support in subsequent years. Some of the beneficiaries of the transfer programmes find the amounts insufficient citing many dependents and lack of other stable sources of livelihood
Loan driven infrastructure investment for social and Economic development from 2015 to 2020 in the social sectors cut across various programmes and subsectors in the social sectors
❚ In Education there are school infrastructure projects in early and basic education, vocational and technical training, University education and Research. The investments support establishment of education, training and research centers, construction of new and rehabilitation of existing facilities as well as equipping them to enhance quality in training. The aim is to expand the facilities to increase access to quality training and support effective transition across all levels of education
❚ In health investments cover development in health promotion, communicable disease control, national referral systems and Forensic and diagnostics. Health promotion projects are aimed at enhancing food and nutrition for the vulnerable, Environmental health services and public laboratory networking project while projects in communicable disease programmes are aimed at Prevention and treatment for HIV/, Tuberculosis and Malaria. In the National referral systems, Projects components include Modernization, expansion and equipping of hospitals including Kenyatta National Hospital, Moi Teaching and Referral Hospital and Wajir District hospital. Other projects in Forensic and Diagnostics focus on construction, rehabilitation and equipping of hospitals and dispensaries, clinical waste management, technical support, basic health insurance for the poor and informally employed and Universal Health Coverage
❚ Projects in water and sanitation include construction and rehabilitation of rural water schemes, drilling boreholes and construction of small dams/pans in ASALs and implementation of rural and urban water and sanitation projects in low-income areas. The focus is to achieve sustainable increase in water supplies for all populations both in rural and urban areas and to increase access to modern sanitation facilities
The opportunity costs of debt financing to social economic prosperity of low-income citizens include:
❚ Debt servicing crowds out private investment in Kenya. The rise in the stock of debt, which is directly proportional to debt servicing, crowds out credit to the private sector and by extension private investment.
❚ Increased burden of debt servicing negatively affects the welfare of low-income households. Through loss of employment opportunities from the private sector thereby worsening their economic welfare. More joblessness and lack of income.
❚ Increased burden of debt servicing results to increased cost of living hence reduction in household’s final consumption expenditure
Regarding the analysis of the levels of citizen participation in the debt cycle.
❚ There is clear constitutional provision for public participation in fiscal decision making in Kenya. The constitution provides space for citizen participation in fiscal policy decision making throughout the budget and debt cycle.
❚ The implementation of the constitutional provision for public participation has not been satisfactory. Citizens have not been adequately engaged in public borrowing decisions. Therefore, most households believe that the public borrowing decision is a preserve of the political class led by the president.
❚ Most of the surveyed Households were dissatisfied with the prevailing public borrowing decision making in Kenya citing misappropriation of borrowed funds adequate involvement of citizens in the borrowing decisions and non-prioritization of their immediate needs
The recommendations from the findings are:
1. The Kenya government through the National treasury should adhere to the Debt policy that encourages increasing amounts of public debt on concessionary terms allowing longer grace periods. Such loans attract lower interest rates and are also associated with lower amounts for service in each period. Longer grace periods can enable the government to retire pending loans while also freeing the fiscal space required to finance social services to citizens
2. The government and the Semi-autonomous agencies should exploit the alternative options for infrastructure investments in public private partnerships (PPPs) to reduce growth in debt. The PPPs enable private capital into investments that support public service provision but are productive. This would free up revenues for provision of services while also allowing the debt service burden to fizzle out
3. Loan driven Infrastructure spending should only be approved if the outputs are associated with large positive externalities and the future income streams from it can sustain repayment of the debt
4. Early disbursement of the equitable share to the counties to enable them sustains programmes that rely on private suppliers. Private suppliers require payments to provide resources to county government and state departments critical to performance of their functions. Suppliers pull affects service delivery and halt in socio economic programmes causing massive losses of gains already made
5. National and County governments should prioritise spending towards critical programmes for the social and economic wellbeing of vulnerable groups and low-income households including supplies of medicines to health facilities and level three and below, capitation to schools and other public institutions, student loans and bursaries.
6. The County governments should ensure fully financing development budgetary allocation to the social sectors to enable expansion of capacity for service in response to rising demand. Service provision from congested facilities even with increase in recurrent spending cannot improve quality of service.
7. National and county governments to ensure effective and efficient budgeting and factor in only the immediate public expenditure needs for recurrent and development financing to curb wastage of resources through corruption.
8. Sustainable measures should be taken to reduce crowding out of private sector borrowing such as prudent external borrowing by the government to avoid competing with private investors in the domestic financial market.
9. The government can reduce debt servicing burden through debt conversion and minimizing commercial external loans that attract higher interest rates.
10. Additional revenue raised through taxes should target progressive taxes which have less impact on the low-income households. VAT on basic commodities that impact heavily on low-income households should be removed.
11. Full implementation of the constitutional provisions for public participation in fiscal management to ensure satisfactory citizens engagement. The national treasury should allocate sufficient time for public participation during budget formulation.
12. National and county governments in collaboration with civil society and other stakeholders should undertake effective civic education for citizens on their right and role in public participation on fiscal management matters. This would enhance their level of participation and quality contribution. Enhanced citizens engagement in the budget and debt cycle would change their perception that decisions on debt is solely the responsibility of the political class.
13. Enhanced accountability and transparency in fiscal management: Stringent measures should be taken to fight graft which the majority of the households felt was contributing to increased debt burden in Kenya