Ruto backs new debt cap pegged on share of GDP

President Ruto

President William Ruto. FILE  PHOTO | POOL

President William Ruto has moved to replace the Sh10 trillion public debt ceiling with a debt anchor as a percentage of gross domestic product (GDP), in line with a promise made to the International Monetary Fund (IMF) by the previous administration, but the Parliament rejected it.

This is after Cabinet on Tuesday gave a nod to the National Assembly to move the debt ceiling from the current limit of no more than Sh10 trillion to a new debt anchor set at 55 percent of GDP in present value terms.

The new ceiling means that the government is already in breach, given that Kenya’s debt is above 70 percent of the GDP and the new administration will now be forced to find means to walk the country backwards through growing the economy and slowing down the brakes on new loans.

Kenya is yet to release the 2022 GDP figures, but based on the 2021 figures, the country’s total public debt should be at Sh6.6 trillion to be in line with the new metric.

But Kenya already breached the Sh9 trillion mark last December, putting it way above the new ceiling.

With a debt anchor, Kenya’s debt limit will now become a moving target from an absolute figure with the present value of debt as a percentage of GDP expected to represent the current debt value in contrast to the current value of future cash flows.

In a Cabinet memo on Tuesday, the government argues the shift to the debt anchor aligns with global standards and that it ensures the sustainability of Kenya’s debt stock.

“In keeping with the global best practice on the debt limit policy, and in furtherance of the administration quest to realise inter-generational equity through sustainable debt management, Cabinet considered the legislative proposal to harmonise the definition of public debt and the attendant regulations,” the Cabinet stated in part.

The new push to adjust the debt ceiling also comes in less than a year since the nominal debt ceiling was pushed from Sh9 trillion to Sh10 trillion last June in what was interpreted as an interim measure to accommodate the deficit financing to the 2022/23 budget to June this year.

The adjustment was nevertheless criticised at the time as a mere action of kicking the can down the road with Parliament having only moved from a previous debt ceiling of a nominal 50 percent of GDP barely two years earlier.

Additional data from the Treasury’s 2023 Budget Policy Statement shows the size of public debt was on course to surpass the Sh10 trillion debt limit by June next year at Sh10.133 trillion.

Former Treasury Cabinet secretary Ukur Yatani had promised to replace the debt ceiling with a percentage measure but this was rejected by the then parliament, instead choosing to increase the ceiling to Sh10 trillion.

The Cabinet also in the same sitting approved the lifting of the moratorium on Power Purchase Agreements to boost energy security by opening up the sector for investments, paving the way for Kenya Power to sign up more players, including the costly diesel generators that President Uhuru Kenyatta regime had blocked in a bid to tame power bills.

“Cabinet further approved a framework for the transparent engagement of independent power producers in keeping with the Renewable Energy Auction Policy.”

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