State piles on Sh1 trillion debt

• Probably cognisant of this, no sovereign bond will be issued this financial year

Kenyans must be feeling relieved after Treasury avoided increasing taxes, but a closer look at the piling debt should be enough to make them think again.

The government in the ending fiscal year crossed the Sh1 trillion borrowing threshold and is seeking to pile up even more.

That pushed the amount each Kenyan has to pay foreigners and local lenders to Sh26,315, distributed at the ratio of 53:47 in favour of foreign lending.

The State in the ending year borrowed an extra Sh130 billion as revenue sources dried up with economic growth stagnating to 1.7 per cent.

But with well over Sh150 billion more expected to be borrowed internally and externally, the per capita debt will shoot up to nearly Sh29,000. The total will equal more than 44 per cent of GDP.

Treasury, however, says it has taken care to avoid crowding out private borrowers and asserts in the newly issued Medium Term Debt Management Strategy that IMF and World Bank are in the picture over their borrowing strategy.

“Debt sustainability analysis done taking into account the planned new borrowing demonstrates that we face a low risk of debt distress,” said deputy Prime Minister and Finance minister Uhuru Kenyatta in his Budget speech.

“Therefore, we are in a position to comfortably borrow in the short term to finance the proposed fiscal stimulus package without compromising our macroeconomic objectives.”

Mr Kenyatta has indicated some foreign concessional lending might be used to offset domestic borrowing. The State has certainly resorted to this with a good reason.

“No international sovereign bond will be issued in the financial year 2009/10,” says the debt management book.

Indeed, 70 per cent of the money in the year will be borrowed locally. The balance is likely to come from the International Development Association, which accounts for 46 per cent of our foreign borrowing, the European Union, the African Development Bank, Japan, France and Germany, who are the top lenders.

In the market, a section of the players agree with the position that Treasury can take the Sh109 billion from the market without raising rates if the Central Bank of Kenya manages short-term rates well. The bank governor took the same position last week.

Players point to the fact that Treasury borrowed Sh17 billion, the highest-ever weekly auction borrowing, last week with the rates edging down.

“I think the crowding out effect is exaggerated here. If CBK manages the short-term rates well, there should be no problem with the rates,” said bond market player Fred Mweni, noting liquidity has returned to the market after the recent crunch.

The short-end rates include repos and the Central Bank Rate over which the chief banker has control.

He further noted most of the Sh109 billion consists of redeeming mature debt rather than fresh borrowing.

Had this year’s Budget been read in the 1990s, the Bretton Woods chiefs would almost certainly have had heart attacks. But tellingly IMF has, by word and deed, supported one of the most extravagant and trickiest budget packages in Kenya’s history.

Curiously, donors appear to have implicitly consented to a policy of no new taxes for consumption in a desperate effort to stimulate the Kenyan and regional economies — in Tanzania’s case they allowed a cut in VAT, from 20 to 18 per cent and a 31 per cent increase in spending.

In addition, most of the tax concession requests, including some repeated yearly by the industry, were granted.

No doubt this has everything to do with the global crisis, an exigency that has left policymakers everywhere throwing hefty amounts of money at the problem.

The first telltale signs that Finance minister Uhuru Kenyatta would get away with what used to translate in IMF books as murder was the Fund’s lending the country Sh16 billion at a time it was engaging in all manner of extravagance.

Instead, at a recent press conference IMF senior representative Scott Rogers was keen to emphasise the need for social spending, which at the time sounded like mere rhetoric given IMF’s history of supporting austerity measures.

But then Mr Rogers went ahead to assert that the inflation rate in Kenya was overstated by 100 per cent, a statement obviously meant at allaying fears of the effect of the pending borrowing and huge budget outlay.

If the growth projection holds and the monetary policy holds rates down, inflation and interest rates may well be controlled at reasonable levels.