Treasury to seek cheaper debt in new fiscal strategy

The outbreak of the Covid-19 pandemic continues to adversely affect the performance of the global economy. Economic growth forecast for 2020 like all countries remains highly uncertain for Kenya. The National Treasury preliminary estimate expects the economy to contract by at least 50 percent. The country has witnessed falling foreign exchange receipts due to drop in exports, diaspora remittances and tourism earnings. The drop in demand, disruption of the supply chain and the sharp deterioration of global financial conditions has negatively affected tax revenue collection with the government responding through various measures to ‘save life’ and safeguard the economy.

Financing these requisite interventions to ‘save life’ and livelihoods remains a daunting task amidst deteriorating fiscal revenues and ensuing debt service obligations and vulnerabilities. Kenya welcomes the support from the private sector, bilateral and multilateral partners to limit effects of the Covid-19 pandemic.

Whereas austerity measures rolled out at the beginning of the financial year together with improved tax administration had repositioned the country towards a credible and sustainable fiscal consolidation path to lower the debt burden and safeguard economic growth, the current Covid-19 shock is an unwelcome set-back. Optimistically, Kenya’s diversified economy is expected to turn-around at the shortest time through sustenance of the already planned policy interventions. For instance, the government is sustaining stability of prices: foreign exchange, interest and inflation rate through effective coordination of monetary and fiscal policy – a prerequisite for business recovery.

Kenya’s economy has grown with debt financing supplementing tax revenue. Most of public debt financing has been channelled to infrastructure development in energy, roads, rail, telecommunication and water and sanitation to support economic growth and development. Investment in infrastructure remains a high priority in raising economic growth and export potential. Over half of Kenya’s current public debt is external debt of which two thirds is on highly concessional terms. The rest of the public debt is local currency denominated domestic debt in form of Treasury Bills, Infrastructure Bonds and conventional Treasury Bonds.

The country’s debt sustainability indicators projection for the medium term, like most countries, have deteriorated on account of the drastic fall in exports, revenues and GDP growth due to the economic shock occasioned by the Covid-19 pandemic. This is consistent with the current global trend.

Most developing countries, and Kenya is no exception, may have temporarily breached some measures of debt sustainability thresholds as a result of the sudden economic shock. The ratio of external debt to revenue and external debt to exports have breached the thresholds set in the new IMF Debt Sustainability Framework for Low Income Countries (DSF-LIC) mainly on account of Covid-19 pandemic shock.

Notwithstanding the perceived breach of thresholds on accounts of dip in export and reduced revenue, Kenya continues to meet its debt service obligations fully and without any delay and considers this event temporary. A strong and stable diaspora remittances, comfortable levels of foreign exchange reserves, and an expected quick re-bound of the private sector activity and employment creation will undoubtedly reverse the scenario.

Going forward, Kenya will re-assess its current Medium Term Debt Strategy to take into account the evolving effects of covid-19 pandemic. Kenya will restrict external commercial loans for refinancing existing commercial debts to lower cost and risks. In addition, commercial borrowing will be used to finance those capital expenditures that cannot attract concessional financing by their nature, for instance security projects. Efforts will be scaled-up to utilise highly concessional loans from multi-lateral and bi-lateral sources on concessional terms.

Kenya has a large portfolio of committed and undisbursed low-cost bi-lateral and multi-lateral funds tied to various development projects spread across the country. Kenya will take immediate measures to address the challenges of donor-funded projects that has led to low absorption of highly concessional loans including grants to ensure the benefit of these resources are quickly realised.

The government will continue to access the domestic debt market to raise resources to finance capital expenditures through innovative products without crowding-out the private sector. Reforms will be implemented to expand the domestic debt markets to enhance efficiency and liquidity in the secondary market.

The cabinet has recently approved the Public Debt and Borrowing Policy which seeks to entrench best international practices in the management of public debt. The institutional arrangement for managing debt will be strengthened and debt transparency enhanced. The cardinal principle guiding borrowing which is ‘least cost and minimum risk’ will be observed at all times. Kenya commits to sustained fiscal consolidation path to ensure that debt remains within sustainable levels over the medium term and into the future.

Finally, Kenya has requested for the Rapid Access Facility from the IMF to supplement its official foreign exchange reserves and budget support to address the current crisis. In addition, Kenya expects to successfully enter a 3-year IMF/WB supported precautionary facility arrangement by end of April 2020 to safeguard the economy against further effects of the shock.