The Kenyan government is facing criticism for its increasing reliance on off-balance-sheet loans, also known as securitisation, to fund infrastructure development. This approach involves pledging future tax collections to lenders in exchange for new loans, limiting the government's flexibility to lower taxes and offer relief to citizens. Analysis by various entities shows that using taxes and levies as collateral poses significant risks, including the inability to lower levies even if circumstances change.
The government's securitisation drive has raised concerns among economists, who warn that it may lead to economic instability. Ken Gichinga, chief economist at Mentoria Economics, notes that leveraging levies and taxes is risky, as future administrations may be unable to adjust to respond to specific economic situations. For instance, if fuel prices are high, the government may not be able to reduce levy rates, leading to economic instability. The Road Maintenance Levy (RML) is a prime example, where the government has securitised Sh7 out of the Sh25 per litre that motorists pay.
The Controller of Budget, Margaret Nyakang'o, has expressed concerns about the lack of transparency in the government's administration of multibillion-shilling financial vehicles. Her office has no visibility into how levy funds are used, opening up the process to abuse. This lack of transparency has raised fears about the government's ability to manage its finances effectively. The government has raised Sh175 billion through securitisation of the RML and plans to securitise another Sh5 per litre, raising an additional Sh125 billion.
The government's securitisation model has attracted critics who dismiss it as debt. Kiharu MP Ndindi Nyoro is among the vocal critics, arguing that it is debt by another name. He claims that this borrowing is not reflected in official debt records, and Parliament was never consulted, raising concerns about transparency, legality, and long-term sustainability of public finances. The Institute of Social Accountability (TISA) has also raised concerns about securitising taxes, claiming that it will be impossible for the country to budget in future without the influence of investors.
Despite criticism, Treasury Cabinet Secretary John Mbadi has defended securitisation, terming it an innovative model to finance mega projects. He notes that Kenya is becoming a key learning point for other developing economies. The government plans to securitise other levies, including the housing levy, Railway Development Levy, and Air Passenger Service Levy, to raise funds for various projects. The money already raised through this model is expected to add up to about Sh980 billion.
The government's use of securitisation has also raised concerns about its impact on the country's debt levels. While the government has defended the model, critics argue that it is a form of debt that is not reflected in official records. The government owes contractors in excess of Sh600 billion, although some of these debts have been settled through the money raised through securitising RML. Analysts note that the government's reliance on securitisation may lead to a significant increase in the country's debt levels.
The Institute of Social Accountability (TISA) has taken the government to court over its securitisation plans, arguing that it will lead to a loss of fiscal space and undermine the country's budgeting process. The court case is ongoing, with TISA claiming that the government's actions are illegal and that the proceeds of securitisation must be part of the national debt. The outcome of the court case is expected to have significant implications for the government's financing plans.
Key points
- The Kenyan government's increasing reliance on off-balance-sheet loans poses significant risks to citizens, including limited flexibility to lower taxes and offer relief.
- Critics argue that securitisation is a form of debt that is not reflected in official records, raising concerns about transparency and long-term sustainability of public finances.
- The government's securitisation plans have attracted criticism from economists, politicians, and civil society organisations, who warn that it may lead to economic instability and undermine the country's budgeting process.
