Mortgaging Kenyans: Why government's use of taxes as collateral could sink the country

There are fears that Kenya’s development is now doomed by reckless borrowing, with economic experts and the Opposition raising concerns that future generations will be forced to shoulder the huge loan burden.

The stakeholders also accuse President William Ruto’s administration of borrowing without the approval of the National Assembly, as they criticise the government’s financing approach, which they maintain lacks transparency and long-term viability.

The government has especially come under heavy criticism following its new securitisation model, where it is borrowing using future tax revenue as collateral, which some analysts equate to mortgaging the country’s assets.

This includes the ongoing Sh44.7 billion bond issued to fund the construction of the Talanta Sports Stadium and planned borrowing of up to Sh175 billion against part of the fuel levy.

This comes even as the National Treasury maintains the securitisation move will fast-track road construction and clear pending bills by converting future fuel levy revenues into tradable securities.

However, legal and finance experts warn that the use of Special Purpose Vehicles (SPVs) for this off-balance-sheet arrangement may breach debt sustainability principles and lock in future revenues for investor payouts.

They maintain that the securitisation approach, coupled with the ballooning debt, was a threat to the stability of the country, urging the government to focus on reviving the economy so that the country may generate enough revenue to provide the services and infrastructure as opposed to over-reliance on borrowing.

Dr Lyla Latif, a lecturer and co-chair of the Committee on Fiscal Studies at the University of Nairobi, says this arrangement transforms what should be a straightforward infrastructure financing mechanism into a complex legal and constitutional crisis that demands urgent scrutiny.

“Kenya Roads Board’s securitisation is based on Section 32A(2) of the Kenya Roads Board Act, which permits the Board to ‘set aside a portion of the Fund for purposes of securing additional funding’ subject to dual Cabinet Secretary approval,” she wrote in Sunday Standard on July 20.

“On paper, this might seem adequate, but in practice, it represents a dangerous circumvention of constitutional safeguards.”

She said the KRB Act contains no explicit authority to repurpose the dedicated funds through securitisation structures or create private sector claims against public resources.

Bernard Muchere, certified fraud examiner, who worked as an internal auditor at the National Treasury for four decades, described the national debt as “odious”, which he claimed has been borrowed not for the benefit of Kenyans, but of the people in leadership.

“When they saw that the Constitution provides very strict safeguards on borrowing and spending the money, they changed the Public Finance Management Act, so that the loans they borrow, which are not for the benefit of Kenya, are retained by the lender, and that way it is easier for them to share it with the leadership,” Muchere told The Standard on Tuesday.

He said if the law required the money to be paid to the Consolidated Fund, it would have been difficult to misappropriate that money, because withdrawing it from required a budget which had to undergo the proper constitutional process.

“Our debt is not sustainable. We borrowed the debt ceiling from America, where you peg the debt ceiling to the gross domestic product (GDP). The law requires that it be at a sustainable level, which means you are capable of paying that loan.

“What do you pay for that loan with? The tax revenue. You don’t redeem loans with other loans. You only repay it from the revenue you collect from taxes and other non-tax revenue,” he noted.

Kenya’s debt stood at Sh11.51 trillion as of May this year, rising by 32.9 per cent since Kenya Kwanza took over in September 2022.

The debt-to-GDP ratio stands at 67 per cent against the legal requirement of 55 per cent. The government hopes to bring this down to desired levels by 2028, a target that analysts note might not be achieved due to the government’s high appetite for loans.

Muchere also noted that pegging Kenya’s public debt to GDP has been unrealistic, leading to larger deficits based on the Treasury’s budgeting for a huge economy, and in turn, has led to the country’s debt being unsustainable.

“When you peg the debt ceiling to the GDP, it is a way of giving a higher level, and there is odious borrowing, because what is GDP? It is the consumption plus investment plus government spending plus net exports.

“Loans are only part of government spending. We borrow to fill the deficit, so it is part of the spending in that GDP. So, when you peg the debt ceiling on the GDP, it is unrealistic, and that is why we have this unsustainable debt level and unsustainable debt,” he said.

Muchere termed the securitisation approach “criminal”, saying “you cannot tax people and then tax becomes a security”.

“When you securitise the revenue you have collected from people as tax and use that tax as collateral for borrowing, why are you borrowing?”

The International Monetary Fund (IMF) also raised transparency concerns in Kenya’s plans to securitise a portion of the fuel levy.

In an earlier statement to the Standard, the IMF said while it does not comment on or endorse specific transactions, it stressed the need for transparency in such a deal while also noting the government should weigh it against the country’s debt levels.

“As a general principle, any securitisation transaction should be assessed on a case-by-case basis to understand the overall implications, including for debt sustainability, pricing of associated risks by other creditors, and compliance with negative pledge clauses that limit a borrower’s ability to pledge assets to other lenders,” IMF spokesperson Julie Kozack said.

She underscored “the importance of debt transparency, which the IMF, together with the World Bank, has been working to promote among debtors and creditors.”

Kiharu MP Ndindi Nyoro has also raised an alarm over what he termed as illegal borrowing from the National Social Security Fund (NSSF).

“We can play around with everything else, but we cannot afford to play around with the money contributed by Kenyan workers. We are forcing NSSF to build roads in Kenya. NSSF’s role is to ensure the workers’ money is optimally invested,” Nyoro said. 

Other than securitisation of taxes, which is being queried by politicians and analysts, the government has, throughout the year, taken to abusing Article 223 of the Constitution.

The Article gives the government leeway to spend on emergencies without having to first seek parliamentary approval, but later get the approval through a Supplementary Budget. 

The Article foresees situations where a need might arise that had not been factored during budget making. It further requires parliament’s approval to be sought within two months after the first withdrawal of the money.

A May report by the civil society organisation, the Institute of Social Accountability (Tisa), noted the abuse of Article 223, with MPs giving the executive a blank cheque due to their nonchalant view of the role they play in approving Supplementary Budgets.

“The failure of the National Assembly to control the appropriation process and its routine granting of retrospective approval of unbudgeted spending in the order of up to 10 per cent of the budget every year – an abuse of Article 223 of the Constitution – perpetuates the ever-rising spending plan,” said the report, further noting that Parliament has turned down petitions to look into the abuse of Article 223.

“In March 2024, the National Assembly was petitioned to investigate past Article 223 exchequer issues through a Judicial Commission of Inquiry, but the petition was perfunctorily dismissed.”

Former Deputy President Rigathi Gachagua said the country was in a serious economic crisis, while he claimed that the public debt was out of proportion.

“We have a serious economic crisis, the public debt is out of proportion, there is no money in circulation, pending bills have not been paid, the cost of living is beyond the reach of the ordinary Kenyan, and everybody is crying,” he said while on his US tour.

“The education system has broken down. All of us and many of you here are beneficiaries of the Higher Education Loans Board that has been put aside and brought up a mongrel of some model that is not working, and many of our students are at home.”

Report by Ndung’u Gachane, Brian Otieno and Macharia Kamau