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Opinion & Analysis

Our debt management policy is flawed

IMF Kenya representative Jan Mikkelsen.  PHOTO | KEVIN MWANZA | NMG
IMF Kenya representative Jan Mikkelsen, Vision 2030's Veronicah Okoth and Strathmore Business School associate professor Prof Robert Mudida during the IMF Economic Outlook for Sub-Saharan Africa and Kenya in Nairobi, November 21, 2017.  PHOTO | DIANA NGILA | NMG 

IMF resident representative Jan Mikkelsen was this week quoted in the local press raising concerns about the rate at which we are accumulating expensive commercial debt.

He said that while the economy had shown resilience to drought and prolonged electioneering, the ballooning debt in the government’s books needed to be checked to avoid dragging down the economy.

Those comments came as a surprise because the official stand by the Bretton Woods institutions has been that our debt levels are still way below levels that would tip us into debt distress.

In fact, the formula that Bretton Woods institutions apply to measure indebtedness- the so called debt sustainability assessment (DSA) framework is what the National Treasury has been regularly trotting out as proof that our debt is sustainable.

Yet we all know that DSA is a very unscientific formula that is arbitrarily applied across countries without regard to local circumstances.

It does not tell you that a country is spending a disproportionate share of national revenues on debt service.

Neither does the formula tell you that a country is spending most of what it is borrowing on wasteful consumption instead of infrastructure.

Mr Mikkelsen’s remarks - coming so soon after recent news that Kenya had failed to pay a syndicated loan that was due in October this year - is a reminder that we are indeed headed for tough times in our relations with international capital markets.

After haggling with the commercial creditors, they agreed to extend maturity of the loans to April next year.

On the current trajectory, something must give. We must drastically change the way we approach debt management. The current regime of managing public debt has proved to be completely dysfunctional.

Responsibility is spread between the External Resource Department, National Debt Office at the National Treasury and the Central Bank of Kenya- with the monetary authority playing a debt management agency role on behalf of the National Treasury.

No single entity has responsibility for the entire debt management chain, starting from issuance of debt, management of the borrowed cash and redemption of debt on maturity.

Does it surprise that the government finds it hard to regularly disclose an up to date external debt register every four months as stipulated under the Public Finance Management Act.

What is best practice in public debt management? From a cursory look at what countries such as Ireland, France and the US have done, some the following trends are discernible.

First, countries establish- by legislation- independent treasury management agencies to be responsible for the entire debt management chain.

In Ireland, the mandate of the treasury management agency extends to liquidity management of the treasury’s current account at the central bank.

Thus, the minister’s role is then to set a target for minimising the risk- adjusted- cost of debt to be achieved over a stipulated period.

Typically, the minister gives the treasury management agency a glide path towards a stipulated target within a period of say 10 years.

The key thing in all this is that the treasury management agency must be an independent body. In this way, the minister is not allowed to just borrow money at whim and fancy.

When did the rains start beating us? We spent too much time and resources on improving management of revenue collections while completely ignoring the management of borrowing side.

Several years ago, we created the Kenya Revenue Authority from what used to be mere departments at the Treasury.

Today, we have a fairly well-functioning revenue authority operating fairly autonomously- complete with its own board of directors.

The mounting debt problem is primarily a management issue.

Despite the fact that the first and main charge on the Consolidated Fund is debt service, transactions on this account remain very opaque.

Clearly, the absence in our system of a dedicated and independent debt management agency remains a major weakness in our public finance management architecture.

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