Kenya plans debt fund to avoid biting cash crunch

Kenya will create a special fund for settling of fast-maturing loans from the financial year starting July in a bid to mitigate future cash flow challenges arising from heavy repayment of debts whose grace period has expired.

The National Treasury said it will imminently gazette rules for establishing the fund to specifically pay off maturing debt, buy back bonds when interest is low and retire some of the debts early to avoid higher costs in future.

This comes at a time when debt redemptions (payment of principal sums) is projected to jump Sh194.57 billion, or 65.17 percent, in next two fiscal years to Sh493.12 billion in June 2023 from estimated Sh298.55 billion in the current year.

Regulation 206 (1) of the Public Finance Management (PFM) Regulations 2015 allows Treasury secretary Ukur Yatani to create a “ Sinking Fund” for redemption of loans and government securities.

The Treasury said in the Debt Management Strategy 2021 that it had developed draft guidelines, which are undergoing a public review process, paving the way for operationalisation of the fund.

Presently, the debt is paid from the Consolidated Fund Services (CFS) which also caters for other obligatory payments such as pension and salaries for some independent constitutional office holders.

The PFM Act, however, provides that debt service can be paid from “CFS or any other fund established under an Act of Parliament”.

Director-general for public debt management at the Treasury Haron Sirima said the sinking fund, managed by the Treasury, will be publicly-funded and overseen by the Office of the Auditor-General.

“It provides flexibility to undertake debt management operations to lower cost and minimise risks in the public debt portfolio,” Dr Sirima told the Business Daily.

Analysts are, however, questioning how the proposed fund will be financed, citing persistent revenue underperformance.

“Ideally, some money will be deposited in the sinking fund towards retiring the debt maturities as they come due rather than relying on more borrowing to refinance the debt,” Mr Churchill Ogutu, the head of research at Genghis Capital, said on phone.

“How they (Treasury) will ring-fence the funds is a matter of conjecture looking at how revenues have been (under)performing. So the big question is how it will be funded unless it will be more of getting more loans to fund the Sinking Fund.”

The Kenya Revenue Authority has struggled to meet the targets in tax receipts, a trend which has been exacerbated by the Covid-19 crisis which has taken a toll on economic activity.