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House sleeps on the job as country chokes on debts

Tuesday October 15 2019

PUBLIC DEBT

Saving the country from an economic meltdown should now be President Uhuru Kenyatta’s number one agenda. ILLUSTRATION | NATION MEDIA GROUP 

MOHAMMED WEHLIYE
By MOHAMMED WEHLIYE
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The subject of public debt and borrowing is emotive and for good reasons.

Payment of debt is a form of tax on all citizens of the country — a first charge on the Consolidated Fund that takes priority over any other expenditure in the national budget.

That is why it is important for Kenyans to know who our lenders are, the purpose for each borrowing, its terms and conditions and assurances that the debt can be serviced without harming the provision of public services.

These requirements for full disclosure about the state of our public debt is provided for in the Public Finance Management Act, 2012.

The Public Debt Management Office (PDMO) is required to make these disclosures.

The current state of our public debt is disclosed in the 2019 Annual Debt Management Report prepared by the treasury.

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Interestingly, this year’s report has more information than past similar reports. It reveals some interesting emerging issues.

CORRUPTION

First, public debt has sharply risen over the last seven years, reflecting an extremely loose fiscal policy stance, which probably explains the lack of commitment by the government to an IMF/World Bank programme that requires the country to exercise fiscal restraint.

Secondly, whereas both domestic and external debts have risen, the composition has significantly changed.

At the start of 2012, Kenya had nearly zero external commercial debts and the structure of external debt portfolio was more towards highly concessional multilateral and bilateral category.

Former President Mwai Kibaki loved concessional debt. Such debts are tied to development programmes and have no ghost or fake projects.

They attract zero or below market interest rates and are repayable over a long period, up 40 years. Today commercial debt is at par with the multilateral debt.

What has changed? What is so attractive about costly and risky debts as opposed to highly concessional loans that are readily available to the country?

The answer is simple — corruption. There is no room for economic rent when it comes to concessional debt. Commercial loans, on the other hand, provide a lot of room for cutting deals.

TREASURY BONDS

Thirdly, on the domestic debt portfolio, the ratio of Treasury bills to Treasury bonds has moved in the wrong direction.

The mix changed from 15:85 to 35:65 — indicating that creditors hold relatively more on Treasury bills, a sign of uncertainty on government fiscal policy.

This portfolio has all the ingredients of high cost and risk components — a shorter maturity means government cash flow is hard-hit by heavy maturities every week.

What the report, however, does not show is the changing structure of the Treasury bonds portfolio.

The duration of this portfolio has been shortening, meaning investors have preferred short-end Treasury bonds as opposed to long dated ones due to enhanced fiscal risk.

Lastly, the debt service to revenue ratio — the amount of revenue that goes to paying debt — has significantly risen to 42 per cent.

Although revenues have been under-performing, projections may also have been overly optimistic based on historical performance of revenue growth.

Nonetheless, the cost of servicing debts has risen and not necessarily due to the uptake of new debts but the type of debt.

DEBT CEILING

Short dated commercial debts — Eurobonds and syndicated bank debts — are costlier than multi- and bi-lateral debts and gobble up significant amount of tax revenues that would otherwise be allocated to finance social programmes.

Our national debt has reached an unsustainable level of 50 per cent to gross domestic products (GDP) in net present value terms set in the Public Finance Management (PFM) law. And we most likely hit that limit a long time ago.

Treasury mandarins have used every creative accounting trick in the book to keep it to within the limit.

Now that there are changes at the Treasury, the cat is finally out of the bag. But a new debt ceiling is just an academic exercise to regularise the current limit breach.

Parliament has already approved the 2019 Budget Policy Statement with a fiscal deficit over the medium term to be financed through additional borrowing.

Parliament also approved the 2019/2020 budget with a deficit of Sh635 billion, meaning the House has no choice but to approve the new debt limit unless it wants to trigger a shut-down at both levels of government.

FISCAL DEFICIT

The current situation was avoidable if Parliament played its public debt management oversight role more effectively.

How on earth, for example, did it approve a fiscal framework with deficits in current and subsequent years when they already knew the public debt has hit the ceiling?

So what should we do to get out of the debt trap cycle that has now taken hold in a truly viscous manner?

First, in order to slam breaks on binge borrowing, the Treasury should immediately implement measures to drastically reduce the fiscal deficit to below the GDP growth level in this current financial year.

Fiscal deficit has been the key driver of our public borrowing and this must be addressed, otherwise even the proposed debt ceiling of Sh9 trillion will be breached within the next two years.

The Big Four agenda is ambitious, costly and contradicts the fiscal consolidation policy stance.

It must be re-visited given the realities of the country's economic performance and the outlook over the medium term.

PENDING PROJECTS

There is a need to urgently review and freeze all new projects except those already negotiated and financed through highly concessional financing from multi and bilateral agencies during this financial year.

We should instead re-focus on completing current commitments, embark on a genuine path to fiscal restraint, improve efficiency of revenue collection through best practices rather than coercion and sustain the recent anti-graft push.

Saving the country from an economic meltdown should now be President Uhuru Kenyatta’s number one agenda.

Second, we need to reverse the current composition structure of public debt to the pre-2012 portfolio structure, which was characterised by longer duration and lower cost and risk.

The restructuring plan must have prior approval of the President or Cabinet and should cover domestic and external public debt.

It must be executed in a transparent, well-guided and time-bound process to avoid under-hand deals.

The Treasury should fully disclose to Parliament the savings arising from such a debt restructuring plan and explain how the additional fiscal space arising thereof will be utilised.

REFORMS

Finally, we must strengthen the capability of the Treasury. A quick review of the management of this critical ministry shows a senior management team comprising individuals on acting capacities.

Although the PDMO now has a substantive director-general, oversight organs should carry out a comprehensive audit on its capability to execute the statutory responsibility of managing the country's massive Sh6 trillion debt.

The PDMO also lacks independence in executing its responsibilities. Time has come to consider operational independence of PDMO as is the case in other jurisdictions.

Finally, we now have no choice but to go back to some IMF/World Bank supported economic and financial reform programmes for credibility of economic and financial policy sake.

Mr Wehliye is a senior advisor at the Saudi Arabian Monetary Authority

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