Kenya, IMF clash on reforms pushing debt past Sh9trn ceiling

A push by the International Monetary Fund to recognise government guarantees and parastatal debts as part of Kenya’s loans will raise debt by Sh3.4 trillion, crashing through the recent Sh9 trillion ceiling endorsed by Parliament.

The IMF says that Kenya’s Selected Specific Fiscal Risks covers seven of the 11 major risk categories identified as important internationally, but does not provide estimates of their magnitude.

Crucial information missing includes government lending programmes, government guarantees, exposure of the financial sector to risk, and legal claims.

“The lack of quantification does not enable an assessment of the potential fiscal impact, nor help develop a prioritised risk mitigation strategy,” the report read.

IMF report on the state of Kenya’s books shows that the government has guaranteed Sh139 billion, which includes the Sh75 billion given to struggling Kenya Airways #ticker:KQ it wants to nationalise.

Public-Private Partnership deals whose contracts remain secret are valued at Sh679 billion by the IMF.

A list of 30 PPP contracts was presented in the 2019 Budget Policy statement while another list of 78 pipeline projects was published in the PPP Pipeline Status Report with a total value of $11.4 billion (Sh1.140 trillion), almost half of which are concentrated in six projects, all of which are at the procurement stage.

Public companies, most of which are loss-making, have a liability of Sh1.494 trillion.

Kenya Deposit Insurance Corporation (KDIC), which wants to take up more responsibility of insuring deposits up to Sh500,000 from July this year, already has an exposure of Sh261 billion for covering deposits up to Sh100,000.

Outstanding pending bills for land compensation reported by the Infrastructure department have a potential to set the country back Sh23 billion. This is without legal claims like litigation on tax issues or procurement disputes.

Net present value of pensions is Sh819 billion as of April 2018, according to the IMF fiscal monitor with an estimated 20,000 civil servants projected to retire every year.

In November, Parliament gave the government room to raise Kenya’s debt ceiling to Sh9 trillion, giving the Treasury the green light to add about Sh2.6 trillion to the exisiting Sh6.4 trillion expected in June.

According to the Treasury, the Sh9 trillion figure will be reached by June 2024. Raising the ceiling means the Senators were doing away with the borrowing limit tied to 50 percent of the GDP.

Treasury officials, however, say this drive may distort Kenya’s debt, pushing back against the emerging IMF pressure.

“The point here is that when it comes to parastatal debt, we report those that are guaranteed. Should we report parastatal debts that are not guaranteed, what is called contingent liabilities because the parastatal has borrowed on the strength of its balance sheet; should it be part of public debt?” Harun Sirima, the director deneral of Public Debt Management Office, said.

“This is the conversation we are having with the IMF and World Bank because that is now what they are pushing for from a different perspective because in other jurisdictions [like] developed countries, these things can materialise but doesn’t that blow up your level of debt,” he said.

“It is a parastatal which has borrowed maybe Kengen [Kenya Electricity Generating Company], maybe KPC [Kenya Pipeline Company], if we look at say National Bank, which is government-owned, it takes deposits, should that be part of public debt? It is at the realm of debate at the expert level because there are reasons for disclosures but there are other things to consider because you are distorting,” he said.

This is not the first time Kenya is pushing back the Bretton Woods reforms, which attach conditionalities to help countries manoeuvre financial crises.

Dangling the stand-by facility, the IMF had tried to push the Central Bank of Kenya to back off from defending the shilling, which it claimed is overvalued by up to 18 percent.

CBK govenor Patrick Njoroge fought back strongly, stating that Kenya was being used as a guinea pig to test a formula that was being used in advanced economies. He said the new methodology had only been in place since 2015.

“We are being used as a guinea pig on the External Balance Assessment-Light methodology. The methodology was used in a black box method, which we cannot accept,” he said.

The CBK rebuffed the Bretton Woods body with a study that indicated the shilling was undervalued.

“Our estimates of exchange rate misalignment based on the Behavioral Equilibrium Exchange Rate (Beer) were largely consistent with estimates using other alternative methodologies,” the CBK said.

Kenya’s biggest currency concern is the cost of its huge dollar debt from commercial banks whose size and sustainability are directly tied to the value of shilling.

The Treasury, has, however, agreed to put together a debt policy framework that will cover some contingent liabilities under the debt office.

“The transparency here is this, have we captured the total public debt as defined by the Constitution. We may not have captured it simply because the fact that we have not yet operationalized these provisions within policy. Because this is what policy says that we need to fully disclose,” Sirima said.

He said that when you talk about public debt, counties are borrowing entities in government and this needed to be captured.