Treasury wants external debt ceiling raised to Sh2.2 trillion

The National Treasury is seeking Parliament’s approval to increase the external borrowing ceiling by Sh1.3 trillion to Sh2.5 trillion to finance mega infrastructure programmes.

The money, to be raised from external sources, will finance the Sh327 billion standard gauge railway, 10,000 kilometre road annuity programme, the 5,000 plus megawatt electricity project, fund ongoing projects under Lappset and irrigation among others.

“The projects will be financed through borrowing,” Henry Rotich, the Treasury secretary, said in Sessional Paper Number 14 of 2014 that was tabled by Majority Leader Aden Duale in Parliament on Tuesday evening. It seeks to raise the borrowing from the current Sh1.2 trillion.

The Treasury said the government is seeking massive financing to meet the cost of the country’s infrastructure development in the second Medium Term Plan 2013-2017.

“The National Treasury on behalf of the government seeks to tap (increase) the recently issued sovereign bond for an amount not exceeding $750m to finance ongoing development projects. Further, the disbursements of the SGR loans are expected to accelerate having satisfied the conditions precedent to disbursements and thereby paving the way for implementation of the project,” Mr Rotich said.

“This taken together with funding (upcoming disbursements) of other projects loans to finance the development budget will drive the quantum of external debt beyond the current ceiling of Sh1.2 trillion.

Mr Rotich said Parliament had in January 2013 raised the ceiling for external debt from $10 billion (Sh800 billion) and set it at $14 billion (Sh1.2 trillion).

“As at September 30, 2014, the government total disbursed outstanding nominal external debt stock stood at Sh1,045 billion against the set statutory ceiling of Sh1,200 billion. This leaves headroom of Sh155 billion,” Rotich said in the sessional paper.

Mr Rotich said the ceiling was set when the dollar/shilling exchange rate was $1 to Sh86, but is now $1 to Sh89.

The request for increased debt comes in the wake of Parliament’s proposal that budget deficit caps be introduced for national and county governments to check Kenya’s spiralling debt.

READ: Kenya's debt sustainable at 46pc of GDP, Ndung'u says

Parliament’s Budget Office said the Treasury has been crafting budgets irrespective of revenues and used debt to plug the shortfall, a move that has resulted in the country’s debt ballooning to Sh2.3 trillion, which is 57 per cent of GDP.

Budget

“One of the ways of ensuring debt sustainability is by requiring the national and sub-national levels of government to spend within their means through introduction of budget deficit caps,” the office said in a recent report meant to advise legislators on economic matters.

The Budget office said the introduction of spending limits would pre-empt insolvency especially at the county governments, reduce wasteful spending and the need for debt financing at both levels of government.

The Treasury, however, says in the sessional paper that country must accelerate economic growth to 10 per cent annually and sustain it at that level for a long period if it is to realise the Vision 2030 objective of transforming Kenya to a middle income economy.

“For this to happen, we need external assistance in the areas of energy, roads and water among others. Please note that the requested enhanced ceiling is for planning purposes only and the loans to be contracted will be subjected to scrutiny by the National Assembly,” he said in the document that Speaker Justin Muturi referred to the Finance, Planning and Trade committee for scrutiny.

Mr Rotich said issues regarding utilisation, accountability and transparency of the proceeds from external loans and grants continue to receive serious attention by the government.

“The Treasury is finalising the Public Finance Management Act regulations which propose to set the External debt ceiling at a present value 50 per cent to GDP, which is also a convergence criterion under the East African Community arrangements,” he said.

Mr Rotich said the Treasury has carried out an analysis of the impact of the expected external loan disbursement on Public Debt portfolio by the end of next month.

The analysis is based on two assumptions that the exchange rate remains at $1 to Sh89.35 as at October 31, 2014.

Under this scenario the Treasury assumes that the absorption rate of six per cent for other externally funded projects, amount to be tapped from the bond will not exceed $750 million, disbursement of SGR currently being processed for civil works is $736 million and disbursement being processed of $458.7 million for Locomotives and Rolling Stocks will remain unchanged.

“The above disbursements of Sh185 billion if added to the current external debt stock of Sh1,045 billion leads to a total stock of Sh1,230 billion. This breaches the ceiling by Sh30 billion,” the Treasury document says.