Heavy reliance on domestic private sector debt is likely to spur inequalities in tax, budget and development policies in the country, debt justice activists now say.

This is because they often come at higher interest rates compared to external concessional loans, and they mature faster, piling pressure on repayment obligations.

Evidenced by the increased tax burden, Okoa Uchumi activists in a report say increase in private sector debt and the associated debt servicing obligations have had negative implications, including fueling tax injustice.

“In a bid to finance the repayment, the government has resorted to reform the tax policies for more revenue collection,” says the report.

Presented at the Kenya debt conference in Nairobi, the report highlights introduction of the Digital Service Tax, expansion of residential income tax bracket, introduction of new VAT rates and restructuring of income tax brackets as some of the some of the tax reforms resulting from domestic borrowing.

“These reforms have not necessarily been progressive. The reforms have furthered inequalities by increasing the burden on taxpayers and reducing the level of disposable income, especially for the poor,” Okoa Uchumi says.

“Moreover, envisaged with the past regime, the proceeds from taxation will mostly be used to service debt instead of funding vital public services.”

As such, it adds that expenditures in pro-poor sectors such as health, education, agriculture and social protection have been limited thus denying a majority of citizens access to quality and affordable services.

The lobby reiterates that private sector debt is costlier to finance. While the average interest rates on external loan commitments have been modest.

This is with a range of between 0.5 and 3.9 per cent, whereas interest rates on instruments such as Eurobonds issued have high-interest rates ranging between six and eight per cent.

Domestically, interest rate for the 91-day T-Bills, for instance, ranged from 6.7 to 9.8 per cent between 2014 and 2021, it says in part.

"Besides higher rates, loans from private creditors have shorter maturity periods compared to those from other creditors."

For instance, the maturity periods for most issued Eurobonds between 2014 and 2021 range from five to 12 years, compared to other external loans which have a maturity period ranging from 18.1 to 26.2 years, with a grace period of between 5.6 and 7.4 years.

In the current financial year, the government announced that it will borrow a total of Sh718 billion.

This would represent 4.4 per cent of the Gross Domestic Product.

It plans to source Sh588.5 billion locally, about 81 per cent of the total, while Sh131.5 will come from international lenders.

In the past eight months to July this year, President William Ruto's Kenya Kwanza government has borrowed Sh1.2 trillion.

This is an outpace to his predecessor Uhuru Kenyatta who borrowed less during the same period of tenure, with data from the National Treasury showing Kenyatta borrowed only Sh437 billion in the first 12 months.

Since September 2022 to July this year, the state has borrowed a total of Sh419.46 billion from the domestic market alone, and Sh716.93 billion in the international market.

Okoa Uchumi insists servicing debt acquired from private creditors critically diverts funds from development expenditures.

“Domestic borrowing from the private sector has also crowded out investment in MSMEs, stifling growth,” the lobby says.

“The increased government's domestic borrowing has shrunk the credit available for MSMEs thereby slowing down the economic output," it says.

"Between 2013 and 2020, the level of access to the private sector and private investment decreased from 12.4 to 7.3 per cent, while the domestic debt stock increased within this pe,riod.”