If your household were drowning in debt, public debt, what would you do? You should cut unnecessary spending, look for ways to earn more, and stop taking new loans. This simple, common-sense logic is at the heart of MP Ndindi Nyoro’s recent call for the Kenyan government to halt borrowing beyond the current public debt level of nearly kshs 12 trillion.
But this is not just a political statement. It is an economic imperative. The weight of this massive public debt is already felt in the pockets of every Kenyan. Borrowing more only deepens the crisis. Let us break down why hitting the brakes is crucial and where the government should look for money instead.
How Debt Forces Higher Taxes
The growing public debt is a tax trap. The most immediate reason to stop borrowing is the direct link between public debt and your taxes. The government does not have its own money. It uses tax revenue. To service debt (pay interest and principal), the government requires revenue. The primary source of the revenue is taxes.
Example
Imagine you take a loan so big that your entire salary only covers the interest. That is Kenya’s situation. A significant portion of our national budget, often over 60%, is allocated to servicing debt. This leaves little for development projects, healthcare, or education.
The Effect
To free up cash and convince lenders that it is creditworthy, the government has no choice but to increase tax revenue. This is why we have seen a flood of new taxes and levies. These include the higher VAT on fuel and the proposed Motor Vehicle Tax.
The higher the debt, the more the KRA will be forced to squeeze from existing taxpayers. This may stifle business growth and hurt low and middle-income families.
The Economic Strangulation With Crowding Out Private Investment
The negative impact of high public debt goes far beyond your pay slip. It actively strangles the broader economy in a phenomenon economists call “crowding out.”
How it works
When the government needs to borrow massively from the domestic market (by issuing treasury bonds and bills), it competes with private businesses for the same pool of money. To attract investors, it offers high interest rates.
The Effect
Banks would rather lend to the government (a safe bet) at these high rates than to a small business or a young entrepreneur looking for a loan to expand. This makes credit prohibitively expensive for the private sector, which is the actual engine of job creation and economic growth. So, high public debt leads to higher interest rates, which in turn lead to fewer jobs and a slower economy for everyone.
The Shilling’s Struggle Because Of Currency Pressure and Inflation
A significant portion of our public debt is in foreign currencies like the US Dollar. To repay these loans, we need dollars. This creates constant pressure on the Kenyan Shilling.
Example
The government and major industries must buy dollars from the market to service external debt. This high demand for dollars versus the shilling can contribute to the shilling’s depreciation.
The Effect
A weaker shilling makes imports more expensive. Think fuel, machinery, medicine, and even the wheat for your bread. This imports inflation, meaning the cost of living rises for everyone. This further erodes the purchasing power of Kenyans, already struggling with high taxes.
Where Should the Government Get Money Instead?
The solution is not to stop funding development. It is to find smarter, more sustainable sources of revenue than debt. Here are a few alternatives:
1. Aggressive Expansion of the Tax Base
Instead of over-taxing a narrow base of salaried Kenyans and formal businesses, the government must intensify efforts to bring the massive informal sector into the tax net. This involves simplifying tax codes and leveraging technology to streamline compliance.
2. Cutting Waste and Corruption
This is the most obvious yet most challenging alternative. A significant amount of tax revenue is lost through corruption and blatant waste in government procurement. Plugging these leaks would free up billions for development without a single new loan.
3. Public-Private Partnerships
In most countries, large infrastructure projects are undertaken using Public-Private Partnerships (PPPs). These include projects like highways and energy plants. The government can partner with private investors.
These investors finance, build, and operate the project. They recover their costs over time. This creates crucial assets without adding to the national public debt.
4. Optimizing State-Owned Enterprises
State-owned enterprises are critical for the development of the country. The majority are loss-making. Transforming those loss-making parastatals into profitable, or at least self-sustaining, entities would stop them from being a drain on the budget. They could even become a source of revenue.
Hitting the Sh12 trillion debt ceiling is a warning sign we cannot ignore. Halting new borrowing is the first, painful but necessary step toward economic sustainability. It is time to break the cycle of debt and taxes and start building an economy that works for all Kenyans.
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