The role of managing Kenya’s public debt could be handed over to an independent office if proposed reforms are passed into law, relieving the Treasury of a responsibility it has held since Independence.
Officials drafting the Public Finance Management Bill said they had received proposals to create an independent debt management authority, which will have power over the level of borrowing by national and county governments.
The authority is envisaged to be either an independent, stand-alone unit at the national level or one that has both national and county arms with representative regional offices similar to the office of the auditor general and controller general.
“We have received the proposal to have an independent debt management authority and probably this is what we will have. It is possible that this will be accepted,” said Mr Felistus Kivisi, assistant director at Treasury’s Debt Management Department.
The proposals could see the debt management department hived off from Treasury to become an independent office with its own budget charged to the Consolidated Fund or sponsored jointly by the national and county governments.
The creation of an independent unit is supposed to shield it from political manipulation or influence by Treasury officials.
“Such an authority would then recruit properly vetted people. At the end of the day, we have to ensure our debt is sustainable,” said Ms Kivisi while speaking at a breakfast meeting where Kenya Debt Relief Network (Kendren) launched a report titled “Foreign Debt and Development Financing: The Kenyan Experience.” Ms Kivisi said “prudent” debt management by Treasury had thus far ensured sustainability of Kenya’s borrowing.
This included a policy of only taking loans with more than 35 per cent grant element were incurred.
An independent authority would be expected to ensure that loans- including those borrowed by counties- do not overburden the citizenry.
“It is very important to have the authority in place because it will ensure that politicians keep off. It ensures that if you want any information on debt in the country, you have a one-stop shop,” said mr Kiama Kaara, a programme officer at Kendren, which submitted the proposal for the setting up of a debt management authority.
Mr Kiama said that such an authority would also insulate Treasury from accusations about discrimination against any county.
“The Treasury would not bear responsibility for prudent or imprudent evaluation of counties to incur debt. It would actually come out as a fair player,” said Mr Kiama.
He cited Malaysia as an example of a country that had adopted the office, though in an advisory capacity. In the US, he said, the debt department of the Federal Reserve was such that it advised the treasury for or against incurring certain debts.
Japan also has an independent debt management authority.
Mr John Mutua, a budget programme officer at the Institute of Economic Affairs, said the need for an authority could be justified by the fact that the department would have more roles managing debt borrowed by the counties.
“The main issue is having sustainable debt, not who is managing it. I would only see the need for it in the light of the expanded roles of the department because of the creation of counties,” said Mr Mutua.
During the breakfast meeting, Ms Kivisi said sustainability of Kenya’s debt would be achieved by ensuring setting borrowing caps and insisting on concessionary debt.
According to a recent Treasury report, Kenya’s total public debt stands at about Sh1.5 trillion, about 51 per cent of the gross domestic product. External debt – borrowed mostly on concessional terms – stands at Sh727 billion.
The director of Centre for Law Research International (Clarion), Morris Odhiambo, however said the only way to reduce debt was to go for commercial type whose strict terms would ensure prudence.
“Is it not true that our level of debt has escalated precisely because there is lack of prudence? We go for it because it seems to be cheap. If we went for commercial debt, we have no choice but to be prudent as we have to meet the conditions of the financiers,” said Mr Odhiambo.
Ms Kivisi disagreed with Mr Odhiambo’s stand saying Kenya would end up being more indebted if it went for commercial debt as that would mean higher interest rates and stricter terms.
She said the reason that Chinese loans had increased was that western donors had hardened their terms.
A report by Kendren showed that donors – mainly the World Bank, the International Monetary Fund, Japan, Germany and France – were increasingly asking for higher interest rates, shorter repayment terms and grace periods.
While the average interest rate in June 2009 was 1.1 per cent, this had gone up to 1.4 per cent by the same month in 2010.
The grace period had reduced to 6.1 years by June last year compared to 7.8 years in June 2009 while the grant element had come down to 45 per cent in 2010 compared to 57 per cent in 2009.