National Treasury secretary Henry Rotich. PHOTO | FILE
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The Parliamentary Budget Office, which advises MPs on economic and fiscal policies, said targeted ceiling, form the current Sh1.2 trillion, was high and that Treasury estimates show it will breach the current ceiling by Sh30 billion at most.
The Parliamentary Budget Office (BPO) has questioned the Treasury’s bid to double the country’s external debt ceiling to Sh2.5 trillion and warned of high interest payment burden in the next five years.
The office, which advises MPs on economic and fiscal policies, said targeted ceiling, form the current Sh1.2 trillion, was high and that Treasury estimates show it will breach the current ceiling by Sh30 billion at most.
“The proposed ceiling is therefore too high,” Martin Masinde, the deputy director, Parliamentary Budget Office told the Finance, Planning and Trade committee on Thursday.
“It is not clear what the total estimated amount required external debt stock is meant for in the rest of the financial year 2014/15 since the spending scenarios exceeds the current ceiling by Sh30 billion.”
The Treasury presented two scenarios of borrowing with the first surpassing the debt ceiling by Sh30 billion and the second by Sh8 billion.
Mr Masinde reckons that the interest payment on debt will be high in five years and a costly burden to tax payers, especially if the borrowing is not used prudently.
Kenya expects to pay Sh147 billion in interest in the current financial year with domestic debt accounting for Sh122 billion and external debt Sh24 billion. It is one of the single largest budget item behind teachers’ pay of slightly above Sh160 billion.
Domestic debt stood at Sh1.26 trillion at the end of September while external loans were at $12, 184 (Sh1.08 trillion)—which is Sh113 billion shy of the current limit.
The Treasury says it wants to double the government’s external debt ceiling to finance infrastructure projects, including a new railway, port, roads and power supply.
We request the moving up of ceiling to accommodate expected inflows. We are proposing that going forward, we will tie ceiling to the size of economy rather than nominal value which is easily overtaken by events,” Treasury secretary Henry Rotich told Parliament on Thursday.
Analysts say the downside to increasing the external debt ceiling is that the country will be more exposed to fluctuations in the exchange rates, and become more interlinked to vagaries of other international markets.
“The benefit to the domestic market from increasing reliance on external borrowing is that it’ll likely reduce refinancing risk on local debt, while enabling the Treasury to maintain a stable interest rate regime,” a Nairobi-based fixed income research analyst told the Reuters on Thursday.
Mr Rotich said the country’s public debt was sustainable at 46 per cent of gross domestic product (GDP) because much of it was supporting transport and other projects that will fuel growth.
Debt had been estimated at more than 50 per cent of GDP until September, but that rate fell after Kenya rebased its economy, estimating GDP at 25 per cent more than previously thought.
“In as much as rebasing of the GDP encourages a country to access more external debt finance, a ceiling of Sh2.5 trillion would be estimated at 53 per cent of the rebased GDP and this is excluding domestic debt. It would therefore mean that most of the revenue would go to debt servicing,” Mr Masinde said.
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