National Treasury is proposing to amend Section 26 (1) (c) of the Public Finance Management (National Government) Regulations, 2015 to set a limit on public debt.
According to the proposed amendment, the threshold of the national public debt will change from 50.0 percent of GDP in net present value terms to 9.0 trillion shillings.
Overall Public debt as at end FY2018/19 (June 2019) was 5.8 trillion shillings with analysts from Genghis Capital estimating that gross public debt as a percentage of nominal GDP will hit 62.0 percent as at the end of FY2018/19.
“We note that as recent as the draft Budget Review and Outlook Paper (BROP), National Treasury had indicated a higher threshold (70.0 percent) of public debt in net present terms. A higher threshold would signal elevated public debt accumulation,” said Genghis Capital.
Section 50 (2) of the Public Finance Management Act, 2012 provides for a debt limit to be set by Parliament, specifically the National Assembly, but Kenyans have not seen tangible progress.
Analysts estimate on the baseline, the 9 trillion shillings public debt will be hit in FY2023/24. Should there be fiscal indiscipline, as has been the case in recent fiscal years, the country is likely to see the debt ceiling hit in FY2022/23.
“Having said that, we do not foresee the debt limit as a static figure but adjustable as is the case in the US. Therefore, we are likely to see the National Assembly has a major say regarding the debt ceiling,” Genghis added.
The proposed amendment is aimed at maintaining access to concessional funding from multilateral and bilateral agencies. With the elevation of Kenya into middle-income earner status in 2014, external debt composition of multilateral institutions declined from 52.5 percent (June 2014) to 30.3 percent (June 2019).
Commercial financing borrowing contribution has edged up to 36.25% (June 2019) from 20.62% (June 2014). It remains unclear why there is a shift towards concessional funding.
Nonetheless, with Kenya receiving USD 750.0Mn development policy financing (PDF) in FY2018/19 and on expectations of a similar disbursement in the near-term, this could be a reason.
To improve the openness of the public debt data, perhaps an external debt register can be re-introduced in public finance management.
Notably, the repealed External Loans and Credit Act allowed for the publishing of the external debt register (last made public as at end of FY2014/15). This will partly improve the informational lag surrounding syndicated loans.
In as much as the proposed amendment is towards a public debt ceiling, the focus should not be lost on the IMF debt sustainability analysis framework, and more importantly, the sustainability of external debt.
Overall, balanced fiscal budgets going forward remains the best route of sustaining public debt. The next best route is slimmer fiscal deficits on aggregate (KES) terms and ordinary revenue-reliant budgets.
On the margin, proposals have been fronted by National Assembly regarding in-budget monitoring of development projects with an aim of improving the viability of public capex. This, should, in turn, curtail excessive borrowing.