Capital Markets

Budget boss eyes special fund for debt repayment

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Controller of Budget Margaret Nyakang’o. PHOTO | FRANCIS NDERITU | NMG

The Controller of Budget is pushing for the creation of a sinking fund for loan repayment amid growing concerns that the country is headed to debt distress.

Margaret Nyakango says that the kitty would ensure enough funds to pay the fast-maturing debt and reduce budgetary disruptions as Kenya struggles to pay the external debt.

Kenya’s debt stood at Sh8.56 trillion as of September, excluding State-guaranteed debt and un-tapped loans and the amount is set to grow significantly in the next two years on maturity of a ten-year Eurobond.

Currently, debt is paid from the Consolidated Fund Services which also covers other obligatory payments like salaries and pensions, a situation that has left the Exchequer exposed.

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“A sinking fund would help the country to gradually save money and avoid large lump-sum payments at maturity. Kenya is gradually moving towards breaching sustainability thresholds,” Ms Nyakango said.

“There is, therefore, an increased likelihood of debt distress in the future.”

A sinking fund refers to money set aside for a specific purpose within a period of time. Governments mainly use them for debt payments to avoid piling pressure on other critical expenditures.

Kenya is grappling with mounting debt repayments due in part to the matured Chinese loans following the expiry of a six-month relief that Beijing had extended to Nairobi last year.

A huge chunk of the debt that Kenya is servicing includes Chinese loans that were used to fund the construction of the standard gauge railway from Mombasa to Nairobi, roads, bridges and power plants.

Ms Nyakango warned that the ten-year Eurobond that will mature in June 2024 will increase Kenya’s external debt service costs to Sh475.6 billion from the current Sh241 billion.

The prevailing Eurobond yields are also much higher than the interest rate of 6.875 per cent that was set when the bond was issued, signalling that Kenya will pay more in case it makes a return to the global debt markets.

For example, the yield on the bond jumped to 12.17 per cent at the end of last week from 10.4 per cent in May.

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The looming debt distress has been compounded by the weakening shilling against the dollar, further pushing up Kenya’s stock of dollar-denominated debt.

Kenya for example paid Sh5.4 billion more in external debt in the 2021/22 financial year as a result of the forex fluctuations.

Ms Nyakango’s push for a sinking fund comes barely a year after the 12th Parliament shot down Treasury's attempts to create the kitty, dealing a blow to government plans to ease future cash flow pressures.

The Parliamentary Committee on Delegated Legislation rejected the Public Finance Management (Sinking Fund) Guidelines of 2021 that sought to create the special fund, 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”.

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