Even as Kenya's National Treasury agonises over a workable formula to tackle its debt, parliament and analysts are accusing it of fiscal indiscipline and likening the setting of the recent debt ceiling to "squaring a circle,” insisting it is an exercise in futility unless it is accompanied by budget reforms and transparency of external debt.
Last month, Treasury managed to push for an increase of the public debt ceiling to Ksh9 trillion ($87 billion) to give room for more borrowing to retire current expensive loans that have seen the public debt skyrocket to $58.1 billion by end June, from $15.5 billion same period in 2012.
Acting National Treasury Cabinet Secretary Ukur Yatani argued that an absolute figure rather than a percentage of GDP provides adequate controls and oversight through openness, accountability and clear fiscal reporting.
The imposing of the ceiling through the amendments to the Public Finance Management (National Government) Regulations of 2015 resulted in a change in the public debt limit from 50 per cent of GDP in net present value terms to Ksh9 trillion.
The Parliamentary Budget Office (BPO) reckons that going by the rate of fiscal indiscipline evidenced by a lack of commitment to fiscal consolidation that has played out in recent years, Kenya is likely to breach the ceiling in the medium term.
Projections already indicate that public debt will hit $60 billion by 2020 and $70 billion in 2022.
“With the inability of adhering to the fiscal consolidation path, the trend of debt accumulation is likely to continue rising,” said BPO in a report titled Up-scaling Public Expenditure Oversight and Efficiency.
It added that the ratio of debt-to-GDP is likely to be contained by economic growth rather than debt fiscal policy designed to contain the expenditures.
Kenya’s debt-to-GDP ratio that stood at 59.9 per cent in September is on course to hit 61.6 per cent by the end of this year.
Genghis Capital said that the ceiling is likely to be breached by June 2023 because Treasury continues to demonstrate high levels of indiscipline at a time when Kenya is feeling the pressure of ballooning deficit.
The deficit void remains monumental even after reducing to 5.6 per cent of GDP in the current financial year from 6.8 per cent in 2018/19, and 7.4 per cent in 2017/18. Kenya is targeting to further lower the fiscal deficit to three per cent in the medium term (2022/23) in a bid to reduce public spending and limit borrowing.
“Debt limit alone cannot be the cure-all of fiscal indiscipline because it will not be cast in stone but will be dynamic,” said Genghis Capital in a research note.
It added that a cloud of opacity shrouds external debt, a case in point being the secrecy that surrounds the financing terms of the standard gauge railway.
Despite promising the ceiling would provide adequate controls and oversight on growth of public debt, Treasury’s dilemma on managing debt conundrum continues to manifest itself.
With accusations that it is just a matter of time before breaching the ceiling, Kenya now believes a comprehensive debt policy offers the ultimate solution.
Effectively, the Treasury has developed the Debt Policy and Borrowing Framework whose objective is to ensure government financing needs and payment obligations are met at the lowest possible cost and are consistent with cautious degree of risk.
The policy that targets to instil discipline in borrowing and debt servicing will act as a guideline for debt management practices, a development that could be emulated by other East Africa Community member states where debt is casting a dark cloud to economies.
Strangely, the policy accords the powers over the decision to borrow on behalf of the government to the National Treasury cabinet secretary. This is irrespective of the fact that suspended Cabinet Secretary Henry Rotich has largely been accused of abusing his powers to sink the country into the current deep abyss of public debt.