IMF deal will add economic pain

One of the conditions prescribed in the new deal Kenya has signed with the International Monetary Fund (IMF) is that we have to make the debt management office independent by end of July this year.

That we must by October expand coverage of regular reporting on public debt to include loans guaranteed by the government to parastatals.

Under the new regime, the Cabinet Secretary for Treasury will have to give up decisions on operational debt issues and stick to issues to do with policy.

Yet there is really nothing radical about these prescriptions. We have been talking about making the debt management office independent for a long time.

If the IMF wanted to help us in the area of public debt management, it should have pressed for broader and more far-reaching reforms. In the first place, the independence of the public debt management office can only happen through legislation.

Which begs the question: Is it really feasible to expect Parliament to introduce major amendments to the Public Finance Management Act within the time frame of the prescriptions by the IMF?

Secondly, I think that true independence of the debt office can only happen if we transfer the mandate of fiscal agent of the government from the Central Bank of Kenya to the public debt management office.

For years, multiple task forces and committees appointed by the government have been pointing out that making the central bank perform the fiscal agent role conflicted with its monetary policy mandate.

If we, really, want to give the debt management office more powers and autonomy, we should be thinking about changing laws to allow the office to assume the role of fiscal agent and put the office in charge of issuance and redemption of government debt securities.

Thirdly, a powerful and functioning debt management office must be one that is in a position to have control over the direction of what happens in the market for securities.

Several government task forces and studies have for a long time recommended the introduction of a system of primary market dealers. We have been complaining about ‘fiscal capture’— domination of the securities market by a few commercial banks.

There were occasions when we thought that banks were boycotting T-Bill issues. Today, many countries in sub-Saharan Africa have moved to a system of primary market dealers where the top banks selected to be primary dealers buy and sell securities on the basis of a reference price given by the national Treasury.

Where you have a system of primary dealers, it is rare that you will hear about boycott of issues. A system of primary dealers was among the key recommendations of the 2013 blue ribbon presidential task force on parastatal reforms.

Fourthly, a truly independent public debt management office can only happen when it has investment bank-level salaries that can attract people with special skills. Finally, an independent and properly functioning public debt office should come with major reforms in accounting.

Today, what you get from the office in terms of statistics and accounting information is an external debt register that resembles mere excel sheets. That office needs to transit to a true external debt register based on a true general ledger compiled under a system of double entry book keeping.

I am surprised that this new deal with the IMF did not come with a major technical assistance component with adequate resources to fund capacity building at the Treasury on some of these technical areas.

Which brings me to the issue of economic austerity. It seems to me that Covid-19 is the IMF’s latest excuse of introducing a crippling austerity regime on us. The programme is all about new tax increases, spending cuts, and elimination of subsidies.

At a time of desperation, the IMF should not be demanding more pain. In the current circumstances, austerity will only depress an already stagnant economy.