Parliament rejects fund for payment of public debt

A parliamentary committee has rejected the creation of a special fund to ring-fence cash for repayment of maturing debt, dealing a blow to government plans to ease future cash flow pressures.

The National Assembly Committee on Delegated Legislation shot down the Public Finance Management (Sinking Fund) Guidelines of 2021, which would have created the special fund for debt servicing, on grounds that the regulations lack the input of Kenyans.

The Public Finance Management (PFM) Act 2012 requires the Treasury to get the green light from lawmakers to set up the “Sinking Fund”.

The Treasury had targeted utilising the fund to pay off maturing loans, buying back bonds when interest is low, and retire some of the debts earlier to avoid higher costs in the future.

“The Fund shall be used to cushion for amortization of liabilities arising from national government loans, redeem maturing …loans to alleviate rollover risks and facilitate debt restructuring and smoothening of maturity profile,” the Public Finance Management (Sinking Fund) Guidelines say.

Currently, debt is paid from the Consolidated Fund Services (CFS), which also covers other obligatory payments such as pension and salaries for some independent constitutional officeholders.

But increased spending on debt payment has hurt Kenya’s thin revenues, squeezed funds available for development projects, and forced some State agencies to borrow to pay salaries, highlighting the burden of the fast-maturing debt on the economy.

“The committee recommends that the House annuls in entirety the said regulatory instrument for failing to demonstrate that sufficient public participation was undertaken contrary to Articles 10 and 118 of the Constitution,” the committee says in its report.

Ministries are, under Article 118 of the Constitution, compelled to invite the public in the process of changing laws, including holding public sittings, and inviting submission of memoranda and expert views.

The report has been tabled before Parliament for debate and approval.

Treasury Cabinet Secretary Ukur Yatani gazetted the regulations in May, saying that the fund will be a liability management tool to help cushion the government in servicing debts.

For example, in July and August, Kenya raised Sh253.46 billion in revenues and spent Sh162.37 billion to pay the debt, shining a light on the impact of maturing debt on public finance.

“The sinking fund will come in handy to assist the government to achieve its desired policy reforms on the administration of public debt management,” Mr Yatani had earlier told Parliament.

Expenditure on principal sums will jump 21.86 percent to Sh608.90 billion in the year to June from an estimated Sh499.66 billion spent the previous year.

The expenditure will further rise to Sh715.67 billion in the year to June 2023 and Sh990.69 billion in the one that will follow.

The bid to create the fund comes at a time the country is facing shortfalls in revenue, largely due to reduced earnings by companies and households.