Why MPs gave nod to Uhuru's Sh9 trillion debt spree

Budget funding crisis, exceeded borrowing limit, and stifled SMEs growth informed move

In Summary
  • Formations were already taking shape to an extent lawmakers allied to the famed Tangatanga were planning to defeat the proposed amendment
Treasury Building
Treasury Building

A looming budget financing crisis forced MPs to cede ground to the government's demand to set the public debt cap to Sh9 trillion.

The Star has established from multiple sources that the government was stuck in its efforts to negotiate new loans amounting to Sh421.9 billion.

The loans in question are from various external sources namely African Development Bank (Sh94.2 billion), China (Sh86.9 billion), Japan (Sh83 billion), World Bank (Sh51 billion), AfD (Sh30.6 billion), South Korea (Sh15.9 billion), and Germany (Sh15.3 billion).

Others are IFAD (Sh12.4 billion), Middle East (Sh9.7 billion), France (Sh5.98 billion), Spain (Sh4.23 billion), European Investment Bank (Sh3.99 billion), Italy (Sh3.06 billion), Belgium (Sh2.83 billion), and Finland (Sh2.3 billion).

There are 10 pending agreements with respect to infrastructure of about Sh149 billion and 14 in respect of water of Sh126 billion.

More agreements are for energy, trade, housing, TVET, higher education, health, environment, basic education, and urban development.

"There was no way the state was going to finance the Sh607 billion deficit in the 2019/20 budget without borrowing," an official privy to the matter said.

The sources hold that this was why there were deliberate efforts by the National Treasury to woo MPs to allow the limits changed from a percentage to the GDP.

Acting Treasury CS Ukur Yatani held lengthy deliberations with the House leadership this week amid fears there was growing opposition to the new limit.

Insiders say anxiety that the borrowed funds would not be used prudently ate into the push by President Uhuru Kenyatta’s administration to be allowed to borrow more.

Treasury budgeted for the debt to be financed by net external borrowing of Sh324.3 billion and net domestic financing of Sh283.5 billion.

With the current debt standing at Sh5.8 trillion, the government was just about Sh200 billion shy of breaking the cap – factoring a GDP of Sh10 trillion.

Experts say that under such circumstances, the country would continue to borrow to repay existing debts and not for development expenditure as contemplated in the law.

It was the Treasury’s warning of the risks that lay ahead that quelled the political machinations that nearly frustrated the efforts of the government to remain liquid.

Formations were already taking shape to an extent lawmakers allied to the famed Tangatanga were planning to defeat the proposed amendment.

This was soon after Yatani sought Parliament’s approval to amendments to the Public Finance Management (National Government) Regulations, 2015.

The team’s (tangatanga) fear was that whoever will take over from Uhuru would inherit a ‘shell of a government with no monies to run state affairs’.

At the height of the moves, the chairmen of Budget and Appropriations, as well as the Finance committee, proposed an amendment to set the cap at Sh7.5 trillion.

Kikuyu MP Kimani Ichung’wa, during the debate on the report by the Delegated legislation, withdrew the amendments they had moved with Kipkelion East MP Joseph Limo.

MPs were further informed that the state seeks to reduce dependence on domestic sources to allow SMEs to borrow more and grow the economy.

The state would then go for loans to be repaid for a longer-term at lower interest so that the same is used to settle the short-term ones which are deemed expensive.

Concern was also raised that key state assets – like seaports, risk being attached to some of the loans that form the country’s current public debt.

And indeed, it was on these fears that the Delegated legislation committee chaired by Gladys Shollei approved the changes "since domestic borrowing is not viable at the moment."

“The government has crowded out the private sector borrowers. This reduces credit to the private sector which in turn adversely affects growth in investment, SMEs, and job opportunities,” the committee report reads.

Shollei’s team also said domestic sources were a high-risk option and also more expensive given that interest rates are higher with a shorter payback period.

“If the country does not generate the targeted revenue in the shorter term before the return on investment is realised, it faces refinancing risk and subjects the country into a debt roll-over where it borrows to repay existing debts which are due,” the committee said.

A lawmaker told the Star in confidence that the situation is so bad that it would take years before the country settles its debts, a situation he says is now worsened by the extended limits.

“Considering how the economy is performing, we have a reason to fear for future generations. However, our current situation is worse as there are no funds for development,” the MP said.

During the debate, House leaders said pegging the debt ceiling at 50 per cent as it applies among the East Africa Community (EAC) states was stifling the country’s growth.

Majority leader Aden Duale exuded the confidence that the debt level will keep declining as a result of returns from the capital investments on which the borrowed funds are spent.

“The country has serious expenditure needs to ensure Big Four is achieved. The projects – SGR, roads, and energy, are historic,” he said.

Minority leader John Mbadi sought that Treasury adopts a strategy that would ensure there is no wastage in government.