Budget office tells MPs to tame Treasury borrowing spree

The Parliamentary Budget Office has poked holes in the new debt policy capping the country’s borrowing limit to Sh9 trillion.

The policy has no guarantees against expenditure shocks, according to PBO following the disclosure that Kenya will only be Sh1.4 trillion shy of breaking the ceiling by the end of 2020-21 financial year.

In their analysis of the medium-term debt management strategy, the PBO economists hold that the country will have no space to borrow further in the event of an emergency.

“By the close of 2020-21, BPS 2020 projections indicate that the debt stock will be at 84 per cent of the ceiling. Therefore, any expenditure-related shock could eliminate the remaining ceiling margin,” the PBO report reads.

Details show that the percentage of the ceiling will rise to 89 per cent in the financial year ending 2022 and 94 per cent the following year.

In what might force Kenyans to dig deeper into their pockets, the country has breached the 30 per cent threshold within which it was to borrow locally.

External debts and its servicing are equally expected to surpass their corresponding thresholds from this year.

This could, in turn, increase the financing risk of external debt and at the same time jeopardise budget plans for the medium term.

Treasury Cabinet Secretary Ukur Yatani set the debt in terms of nominal value instead of pegging the same on a percentage of the GDP.

Prior to the changes to the Public Finance Management Act, the debt was capped at 50 per cent of Gross Domestic Product.

This was on realisation the country faced a crisis after the debt rose to Sh5.8 trillion,  Sh200 billion to the cap.

But with the adjustment to nominal values, the PBO says the rising stock debt would cause an increase in debt servicing expenses.

“This will result in pressures on the domestic and external revenue,” the PBO said in its latest report to the National Assembly.

The country at the same time is faced with continued debt refinancing pressure, more so from domestic debt, amid cash constraints.

In this regard, the country will have to grapple with funding sources to repay Sh990.9 billion of total domestic debt due to mature in the next year.

“This is only a marginal reduction from Sh1.04 trillion in financial year 2019/20 indicating sustained refinancing pressure for the next year,” the report says.

Further, the team warns that the country will be forced to borrow more in the face of the shortfalls posted in revenue - with targets being missed year-on-year.

“This could necessitate a possible increase in borrowing or budget rationalisation,” PBO says.

The economists flagged the government’s guaranteed loans which stand at about Sh158 billion as another risk factor as most loans are not performing.

“There is a need to limit the use of commercial debt over the medium term in order to reduce the related refinancing risk.”

The independent office watered down the proposal that a portion of the external debt be in local currency.

The new policy is expected to reduce the impact of exchange rate risk and change the currency composition of the country’s debt portfolio.

“The strategy of how this will be achieved is not comprehensively explained. Even the reforms proposed for the domestic market seem to be repetitive with little information provided on the implementation and impact so far,” the PBO said.

“Information on the progress of the indicated domestic market reforms intended to support public debt management is missing.”

The development may come to exonerate critics of the debt cap being set in terms of nominal value.

At the height of the clamour to change to the new system, Suba South MP John Mbadi said the new dispensation was likely to give Treasury a free hand to borrow.

Kitui Central’s Makali Mulu said as a general principle of public debt, the current generation should not borrow in a way that it would punish the future generations.

There have been hushed undertones that some of the loans have been used to fund recurrent expenditure.