State engages public on capping debt at 55% of GDP

The country's debt is currently held at Sh10 trillion limit

In Summary
  • This is the third time in less than three years Kenya is replacing debt ceiling measure.
  • Going by the proposed changes, the country's debt is supposed to be capped at Sh6.6 trillion.  
Treasury building
Treasury building
Image: FILE

The government is seeking the publics views on plans to cap debt at 55 per cent of Gross Domestic Product (GDP) from the current absolute figure of Sh10 trillion.

The National Treasury in a notice has invited the public to give feedback on the decision to delete regulation 26(1) subparagraph (c) of the Public Finance Management (Amendment) Regulations.

"The Cabinet Secretary shall at all times maintain public debt at levels not exceeding 55 per cent of GDP in present value terms,'' the new subparagraph reads in part. 

It adds provided that if at any time the public debt exceeds the threshold, the Cabinet Secretary shall submit a report to the Parliament, explaining the cause of the breach and a time-bound remedial plan.

This is the second time in just a year the government is revisiting the debt ceiling plan after the past regime did away with the debt to GDP ceiling to cap it at Sh10 trillion.

Leader of the Majority Amos Kimunya in the Uhuru administration told the press in June last year that the plan to increase the public debt ceiling to Sh10 trillion was a stop-gap measure to allow the next government (current) to borrow Sh846 billion to plug the budget deficit in the fiscal year ending June 30.

He told MPs that the country is in a situation where it cannot do the 2022/23 budget without raising the debt cap.

Initially, the government had capped debt at Sh9.1 trillion after the Parliament approved the debt ceiling limit in 2019.  The country's total debt as per the latest figures by the National Treasury stands at Sh9.2 trillion. 

The government also wants the law changed to provide that public debt is not restricted as a charge on the Consolidated Fund. The bid is to get a leeway to charge ministries, state departments, and agencies repayments for public debt.

In March, President William Ruto supported the move to replace the Sh10 trillion public debt ceiling with a debt anchor as a percentage of gross domestic product (GDP), in line with a promise made to the International Monetary Fund (IMF) by the previous administration.

The new ceiling means that the government is already in breach, given that Kenya’s debt is above 67 per cent of the GDP and the new administration will now be forced to find means to walk the country backward by growing the economy and slowing down the brakes on new loans.

According to the latest Economic Survey by the Kenya National Bureau of Statistics (KNBS), the country's nominal GDP stands at Sh12 trillion, meaning, the country is already in breach of the 55 per cent threshold.

Going by the proposed changes, the country's debt is supposed to be capped at Sh6.6 trillion.  

With a debt anchor, Kenya’s debt limit will now become a moving target from an absolute figure with the present value of debt as a percentage of GDP expected to represent the current debt value in contrast to the current value of future cash flows.

The proposed limit of 55 per cent of GDP in net present value terms is in line with international standards for a lower-middle-income economy such as Kenya.

The International Monetary Fund (IMF) caps debt to GDP at 72 per cent.

Even so, this mode of debt measuring has been contested by various credit rating firms including Moody's recommending debt to exports ratio. 

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