East African farmers and producers under their umbrella organization Fair-trade East and Central Africa Network have pointed out the lack of markets for their produces as a major hindrance towards them achieving the middle-income status.
Agribusiness Industry

Kenya advised on boosting agriculture and tourism to reduce unproductive debt

As at June 2018, Kenya`s main foreign lenders included commercial banks, China and World Bank at 33 per cent, 22 per cent and 20 per cent respectively. Interestingly, Kenya owes its foreign debt to more than 20 countries and institutions.

In 2013, Kenya’s domestic debt was 54 per cent against 46 per cent external debt. This has since changed.

In February 2019, domestic to external debt tied at 50 per cent but will definitely change with Euro bond three and the refinancing of the syndicated loan.

During the same period, Kenya’s debt stood at Sh5.3 trillion increasing at a compounded annual growth rate (CAGR) of 24 per cent since 2013 and absolute growth of 191 per cent.

Of grave concern on matters, external debt is the country’s ability to generate dollar revenue. Foreign debt, most of which are denominated in US dollars, is only paid back in US dollars.

The Key indicator stops being a debt to gross domestic product (GDP) and focuses Shifts to debt service ratios. The question that lingers is whether Kenya is able to generate enough revenue in hard currency to service her debts.

For every Sh100 the country earns from its exports, Sh70.7 goes to debt servicing without even factoring in the amount to be spent on imports. External debt is a transfer of wealth from the country to the creditors hence the debt has to be more productive to ensure that it boosts the economy to cover the external transfer of wealth.

Unfortunately, Kenya’s debt can be classified as unproductive as it is not self-liquidating and has led to more borrowing in 2018 and 2019 in the international markets to be able to repay maturing debt.

A grave danger of borrowing in hard currency is having a currency mismatch like borrowing in US dollars to invest in projects that generate Kenya Shillings, or projects that do not increase the ability to generate dollar denominated revenue.

Kenya’s external debt has gone into Kenya Shilling generating projects – of the amounts that can be accounted for – hence a huge currency mismatch.

Kenya earns her US dollar inflows on exports predominated by agriculture, followed by diaspora remittances, foreign direct investment (FDI) and tourism. However, there is not much of the external borrowing that has gone to improve these sectors to make them sustainable and more efficient.

Budget allocation to the agricultural sector has been stagnant or on a decline for the past 5 years as well as a negative credit growth from commercial banks to the sector.

Tourist arrivals have also been generally flat with a muted growth over the same period. Diaspora remittances had an unexplained spike around the Supreme Court ruling and have been growing at a suspicious pace.

A portfolio of policies with emphasis tailored to a country’s niche in the global market is the surest way to go. Case in point, agriculture is known to be the engine of Kenya’s economic growth and a valuable source of income for most citizens.

About 75 per cent of Kenyans derives all or part of their livelihoods from the sector which accounts for 18 per cent of GDP.

In spite of this, maximum yields have not been reached in arable land leaving the considerable potential for an increase in productivity. What’s worst, most farmers work without modern seeds and technology or adequate financial and extension services.

In an effort to reduce debt, the government should, therefore, start off by increasing both monetary and technical support to this sector. A focus on this sector and the country coming to terms that it is an agricultural economy will lead to an increase in the quality of exports at reduced costs making them more competitive leading to improved export earnings. An overvalued Kenya Shilling is also enemy number one to the sector.

Export destination diversification is also a positive trade objective in sustaining economic growth as it will make Kenya less vulnerable to adverse terms of trade Shocks by stabilizing export revenues which will see to the more rapid growth of income.

Other policy measures that can be adapted to fix the existing problem include balancing the budget gradually. Without a balanced budget, the need to borrow continues. Reducing recurrent expenditure by moving to contract-based employment and economic projects prioritization is also key.

Just like Rome was not built in a day, Kenyan government Should not try and implement everything in one election cycle. Against this backdrop, a saying goes that the only man who sticks closer to you in adversity than a friend is a creditor. Until we clear our debt, the creditor will pretend to be our best friend.

The author, Reginald Kadzutu, is Chief Investment Officer at Amana Capital Limited.