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With new ceiling, we’ve hit dead end

Tuesday November 12 2019

PUBLIC DEBT

President Uhuru Kenyatta signs the Finance Bill 2019 into law at State House, Nairobi, on November 7, 2019. The passage of the law was a necessity and its main lesson for the citizen is that irresponsible borrowing and public investment in projects of vanity are costly. PHOTO | SAMUEL MIRING'U | NATION MEDIA GROUP 

KWAME OWINO
By KWAME OWINO
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Last week, the Senate passed a bill to allow for the adjustment of the debt ceiling to an unprecedented Sh9 trillion.

The National Assembly had passed the same legislative proposal a few weeks ago.

The arguments placed before Parliament was that the National Treasury required this adjustment to enable it to have greater scope for expanding the public debt.

However, during the debate before the Senate and the National Assembly, there was no convincing argument about why the limit was changed as a ratio of the gross domestic product (GDP) to the quantification in terms of Kenyan shillings.

What is clear is that Parliament has given the Executive, through the Treasury, a breather as the limit on public debt, which was at about 60 per cent of GDP, had been passed nearly a year ago.

JUSTIFICATION

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To make sense of the new limit, which is stated in the direct monetary quantum, one would have to admit that the change from a ratio to a nominal figure is superficial.

The Sh9 trillion limit is still measurable in terms of its proportion to the overall national income.

The Sh9 trillion would be equivalent to about 100 per cent of GDP in June 2019 — meaning that the debt limit has been raised by about 40 percentage points because the existing debt is already at about Sh6.3 trillion.

The justification for the change from proportional measure to the specific shilling terms is not stated and would not be a meaningful difference.

In essence, the Executive managed to convince both Houses of Parliament to extend the debt that can be accrued and, by extension, approved future taxation.

This is because every approval of sovereign debt by Parliament is an explicit approval of taxation since debt is a non-discretionary budgetary item in Kenya’s budget tradition and constitutional architecture.

PAYMENT PRESSURE

Therefore, the summary for the taxpayer is that both arms of government bought about three more years of space to accumulate debt and committed the incomes of citizens to make payments thereof.

Since the redemption of public debt in Kenya has raced above revenues and overall economic growth, there is, no doubt, immense payment pressure.

This is not only evident in that government servicing of development expenditure has slowed at both the national and county levels but also there is a backlog of suppliers who are owed.

This pressure is evident and the government needed to relieve it by finding new avenues to borrow.

The only option the Treasury had was to ratchet up the debt ceiling and get that relief, albeit temporarily.

The debate in the Senate was far more extensive and explored the implications of this extension than in the National Assembly.

In the Senate, there was the proposal to amend the bill to create a Public Debt Council.

NO WAY OUT

The council’s roles would have been a replication of what the Treasury’s public debt management office does, which would have been a superfluous imposition.

But the proposal is a manifestation of the mistrust some senators have for the disclosure regime that the Treasury has adopted, and of the public debt register.

The discourse on the national debt and its management will be a key issue in economic policy for the medium term and this extension of the debt ceiling is not a solution to it.

Despite that, the Treasury will have an opportunity to utilise this space to reduce the fiscal pressure that engulfs the public sector.

In support of the law, legislators argued that the Treasury would utilise the new resources to commercial debt with multilateral and concessionary debt.

The suggestion here is that the Treasury would engage in arbitrage by retiring high-interest and short-tenure debt with lower-interest and longer-term borrowing from multilateral institutions.

While the Legislature did not get any enforceable commitment from the Treasury that this arbitrage will happen, this rationale is a reminder that there are no more options and financial tricks to resolve Kenya’s debt issue.

LESSONS

The passage of the law was a necessity and its main lesson for the citizen is that irresponsible borrowing and public investment in projects of vanity are costly because it reduces growth but also implies higher claims on future taxes.

For Parliament, it is one more illustration that the failure to exert sensible control on the public purse also ties its hands and limits its scope for reducing public spending.

For the Executive, and the President in particular, it is clear that the rosy views about Kenya’s economic maturity and high affinity for commercial loans and the Eurobonds were an error.

All the vanity in the public sector has cost the taxpayer even more.

Mr Owino is the executive director of the Institute of Economic Affairs-Kenya.

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