Kenya must put a tight lid on its debt load to keep its economy on a steady growth path, the International Monetary Fund (IMF) and the World Bank have warned in a note to key organs that determine their lending to member states.
East Africa’s largest economy risks rapid debt escalation when planned borrowing for the mega projects in the pipeline are taken into account, raising the red flag for the very first time on the dangers to growth that is looming from Jubilee government’s leveraged infrastructure development plan.
“A more detailed discussion of the costing of programmes and projects envisaged under the second medium-term plan (MTP-2) would be warranted in order to better assess their potential impact on debt sustainability,” the lenders say.
The IMF-WB joint note proposes that Kenya finds new mechanisms of funding its huge infrastructure projects that is devoid of debt as envisaged by the MTP-2.
It recommends that Kenya should explore innovative funding mechanisms, including public-private partnerships and assesses how any new programmes and projects will be incorporated into the government’s medium-term expenditure framework.
“Macroeconomic policies should cement recent successes by [among other things] aiming at gradually lowering the public debt-to-GDP ratio while raising infrastructure investment,” the Bretton Woods institutions say in a memo that was circulated to their executive boards early this week.
The executive boards are the decision-making organs that offer or deny credit to IMF and World Bank member countries.
Kenya has committed to borrowing billions of shillings to finance mega public infrastructure projects including the building of a standard gauge railway line between the port city of Mombasa and the capital Nairobi.
The country has also borrowed billions of shillings to finance power generation and road construction. It is estimated that these borrowings could soon take the debt load past 60 per cent of GDP.
Borrowing plans should remain anchored on the government’s medium-term debt management strategy, the report says suggesting that the debt ratio be kept at not more than 50 per cent of the GDP.
Kenya’s debt load crossed the 50 per cent of GDP mark late last year to stand at Sh2.11 trillion or 57 per cent of GDP by end of December 2013.
And in what appears to have informed President Uhuru Kenyatta’s recent drive to cut the public wage bill, the Bretton Woods lenders say management of government’s expenditure on salaries and allowances will be key to securing resources for development in the medium term.
The memo on the state of Kenyan economy singles out recent increases in the salaries and allowances of MPs, members of county assembly, lecturers and teachers as a having contributed to a steep rise in the wage bill’s share of national and county spending.
Fiscal discipline will break down and disrupt provision of public services if the wage bill growth is left unchecked, the memo warns.
Kenya must rein in “the recent increases in the wage bill that could crowd out spending in much-needed infrastructure investment and social protection,” the lenders say.
An unsuccessful fiscal devolution and unchecked growth of the wage bill could derail fiscal discipline, leaving lower buffers to deal with adverse shocks, and disrupt provision of public services.
The IMF and World Bank’s warning is in line with the Controller of Budget Agnes Odhiambo’s recent signal that the government must reduce the debt burden before it gets out of hand.
Mrs Odhiambo says in her latest budget execution report that the Treasury must assess the debt pattern against the prevailing macro-economic environment and take remedial measures, including pursuit of austerity.
“Austerity measures should be enforced through all government entities to eliminate low priority expenses,” she says.
The IMF and World Bank say Kenya’s debt reduction strategy should include the costing of projects. The World Bank’s annual financial commitments to Kenya in the past five years stood at between Sh26 billion ($301 million) and Sh76 billion ($881 million).
The IMF has lent Kenya some Sh65 billion (or $750 million) in the past three years to cushion the economy against currency shocks.
The Salaries and Remuneration Commission (SRC) is expected to hold further public debates on the wage bill that President Kenyatta launched a week ago to help come up with an overall position.
“We are going into the counties from next week to listen to the views of the people. This exercise should take us two weeks and this should enable us to come up with a position on how to deal with the wage bill,” said a source at the commission.
Benji Ndolo, the director of the Organisation for National Empowerment (ONE), a lobby group, said the proportion of the wage bill to national income had risen disproportionately because many public sector workers were lethargic, denying the economy the rate expansion it needed to carry the burden.
“We have people in the public service who spend most of their time day-dreaming and therefore have very low output,” he said.
Kenya’s wage bill-to-GDP ratio stands at 12.5 per cent, according to the SRC.
East Africa’s largest economy has recorded the slowest rates of expansion (less than five per cent per annum) in the past five years — trailing its neoghbours even as its debt load grew by double digits.
Kenya’s neighbours Uganda, Tanzania and Rwanda have been growing at the rate of between five and eight per cent.
“The wage bill is not so much about the cutting salaries at the top, but about reducing waste, allowances, overheads, and cars within the public sector,” said Mr Ndolo.
The IMF and World Bank report says the objectives of growth under MTP-2 — which include speeding up expansion to the rate of seven per cent by 2018 — can only be realised if Kenya improves governance, keeps inflation low and refines the business environment.