Columnists

Kenya’s debt trap deeper than thought

ukur-yatani

National Treasury Cabinet Secretary Ukur Yatani during the launch of Economic Survey Report 2021 on September 9, 2021. NMG PHOTO

Summary

  • According to the Controller of Budget, as recent as August 16, 2021 a syndicated loan of Sh15,035,407,020.70 was due for repayment and the Treasury went to the domestic market to borrow to repay the foreign debt.
  • This is one of the most reckless fiscal management decisions that any government can make.
  • Borrowing from the local market to repay foreign debt comes with huge foreign exchange risks; it’s a double whammy increasing the cost of servicing external loans and the size of public debt at the same time.

Last week, in a presentation to the Senate Standing Committee on Finance and Budget, the Controller of Budget unleashed the bombshell that Treasury has been borrowing from the local market to repay foreign debt.

This is a reality some of us foresaw coming when we looked at the trajectory debt accumulation had taken but we never wished it to come.

According to the Controller of Budget, as recent as August 16, 2021 a syndicated loan of Sh15,035,407,020.70 was due for repayment and the Treasury went to the domestic market to borrow to repay the foreign debt. This is one of the most reckless fiscal management decisions that any government can make.

Borrowing from the local market to repay foreign debt comes with huge foreign exchange risks; it’s a double whammy increasing the cost of servicing external loans and the size of public debt at the same time. An economy that takes this huge risk is always one in a debt trap, so, is Kenya already in a debt trap?

Prior reports have been classified Kenya’s debt position as sustainable but heading towards distress level arising from high servicing obligations. But this latest revelation by the Controller of Budget tells us a different story.

We are in a more vulnerable position than we are aware of, and various policy actors seem to downplay this reality.

The Central Bank of Kenya (CBK) whose mandate is to assess and monitor foreign exchange risk and its effect on the economy seems unaware of this problem. It has been hunting commercial banks’ transactions posing a risk to the currency but missed government borrowing locally to service foreign loans.

Just a day before the Controller of Budget presented her report to the Finance Committee, the CBK governor made a debt presentation to the committee but missed this concerning fact.

How the CBK missed to identify this huge foreign exchange risk is surprising because it is the institution that clears those debt payments. Should we be worried that we have a central bank flying blind?

Second, the Controller of Budget also noted that on June 30, 2020, a total of 70,167,610,083 from a sovereign infrastructure bond went into recurrent expenditure.

This is another reckless fiscal management and against the PFM Act, 2012 which states that the national government’s borrowing shall be used for the purpose of financing development expenditure and not for recurrent expenditure.

Though this is not shocking, the Treasury has been contravening this law for a number of years now without being reprimanded by the National Assembly, which has the oversight authority.

Third is the issue of payment of commitment fee, which I raised in the column a few months ago. The issue exposes the Treasury as not bothered to protect the taxpayer.

When government signs for a loan but doesn’t utilise it — normally due to the pre-conditions the lender set before disbursing the funds — it attracts a commitment fee so as to keep the credit facility open for absorption when the conditions are met.

The taxpayer has paid Sh1,657,544,758.23 in commitment fee to the various credit facility signed but not utilised. The Controller of Budget has recommended cancellation.

But cancellation shouldn’t be the first move because these loans are concessional, meaning that their terms are favourable.

So what the Treasury should do is to prioritise their absorption by facilitating the various implementing agencies to meet the preconditions.

This was the position of Treasury Cabinet Secretary Ukur Yatani when he came into office but it seems like it didn’t take off.

Lastly, the Controller of Budget summarily told the taxpayers that the country’s debt management programme is just lip service.

For example, in this financial year 2021/2022, debt repayment is budgeted at Sh1,169,165,030,917, which is 36.6 percent of the budget — the highest component of the budget and around 65 percent of total tax collection. Shouldn’t this mean that we should expect more domestic borrowing to repay foreign loans?