Treasury targets public debt cut to 45 per cent GDP

The Treasury intends to cut the public debt level to about 45 per cent of the gross domestic product (GDP) in the next few years, down from the current level of 51.5 per cent.

Domestic debt stands at Sh1.4 trillion while foreign one is at Sh1.3 trillion, making a total of Sh2.7 trillion. At a go, the Treasury increased the public debt by Sh283 billion ($2.75 billion) when it raised money last year through a sovereign bond.

The debt has risen in the past one year due to the spending on infrastructure, especially the standard gauge railway in which the government is providing more than Sh100 billion besides the Sh330 billion loaned by the Chinese government.

The Treasury plans to cut the Sh2.7 trillion public debt by reducing the fiscal deficit which has been rising and is currently at 9.3 per cent of the GDP. By June 2019, the deficit should fall to 4.5 per cent of the GDP.

“The level of public debt is currently sustainable at 51.5 per cent. It would be unsustainable if it exceeded 74 per cent. Our aim however is to bring it down in the next few years to about 45 per cent,” said Geoffrey Mwau, Treasury director-general for budget, fiscal and economic affairs.

READ: CBK raises the red flag over Treasury’s high appetite for debt

Dr Mwau said the Treasury would want the debt ratio at below 50 per cent to ensure there is fiscal space to absorb spending shocks that may come along unexpectedly.

To be able to repay the debt comfortably revenue has to rise. Since the revision of the GDP calculation that raised the numbers, revenues as a proportion of the economy stand at 18.9 per cent down from nearly 25 per cent previously. Dr Mwau said the Treasury intends to increase revenue to GDP ratio to 21.8 per cent by 2018 — the main source of revenue is taxation.

The debt has risen due to spending for security, infrastructure and wage increments in the past few years, Dr Mwau said. In the 2015/16 budget, allocations for national security were raised by more than 50 per cent from the previous financial year.

Infrastructure spending was raised by more than 20 per cent compared to the year before. Spending pressures have been made more complicated by the fact that there are many donors who have not honoured their pledges for financial aid.

“A major factor in low expenditure is slow disbursement of donor funds,” said Dr Mwau during the launch of the Sector Working Groups that contribute towards the annual national budget preparations at the KICC in Nairobi.

He said spending would face more pressures going forward with the court award of Sh17 billion to be paid annually to teachers. It would require an increase in taxes or development spending cuts or borrowing. It could also be a combination of these measures, he said.

READ: Treasury considers budget cuts to pay teachers

“What we have to realise is that other workers are also going to demand an increment in order to harmonise their salaries with those of teachers,” Dr Mwau told the meeting.

He further warned that interest rates were likely to rise with the recent upward revision of benchmark rates by the Central Bank of Kenya.

At the same meeting, Treasury secretary Henry Rotich said the government had a target of between seven to 10 per cent of sustained economic growth in the medium term as envisaged under the Second-Medium Term Plan of Vision 2030.

Mr Rotich said the broad economic policies and development agenda in the next few years would remain as outlined in the 2015 Budget Policy Statement (BPS).

The BPS puts the overall strategy under five pillars including creation of a conducive business environment, investing in agricultural transformation and food security, investing in transport and logistics, investing in social services, and supporting devolution for better service delivery and enhanced economic development.