Taming public debt elusiveWednesday December 14 2022
Three months ago, a new sheriff came to town. And of course, that has meant a new way of doing things in several aspects of public administration.
However, we are yet to see a disruption in the management of public finances and one key area that still awaits reforms is public debt management.
There is no doubt that in recent years, the management of public finances has been marked by fiscal indiscipline with massive expenditure overruns.
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Financing excessive expenditures through borrowing has driven Kenya’s level of debt distress from low risk to high risk within a short period of time.
Unfortunately, Parliament, which holds the powers to restore order in public finances, failed in its oversight role to restrain the Executive’s excesses and instead rubber-stamped fiscal expansion at levels not seen since the 1990s.
There are two possible ways to disrupt public debt management. First, the functions of national debt management can be expunged from the National Treasury altogether and handed over to an autonomous agency, a public debt management authority.
Back in October 2020, a bill was tabled in Parliament to provide a legal framework for the establishment of the same. The bill melted away somehow.
Whereas an independent debt management office will not be the panacea for the recent borrowing binge, it has the potential to increase transparency and accountability in the management of public debt and borrowing.
By design, the core mandate of a debt management office, whether independent or otherwise, is to execute borrowing plans as approved by Parliament. Reduction of budget deficits is not its mandate.
The second option is to operationalise the established institutional & operational arrangements for public debt management as contained in the Public Finance Management (PFM) Act of 2012.
This robust piece of legislation by any measure established a public debt management office (PDMO), and Section 64(1)(a) of the Act specifically asks the Cabinet Secretary for Treasury to delegate to the head of the public debt management office all the operational decisions on borrowing and debt management and the day-to-day management of the office.
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The Cabinet secretary’s role is only restricted to policy and reporting to Parliament. For quite some time this has not been the case in full breach of the law notwithstanding the oversight role of Parliament, the Office of the Auditor General and the Controller of Budget.
This failure (and subsequent interference) has introduced two major problems: (i) it has impeded the implementation of an optimal debt management strategy that minimises financing costs and risk both in the medium and long term.
For instance, the 2021 medium-term debt management strategy outlined a borrowing in the ratio of 57:43 in net external and net domestic borrowing as the optimal strategy that minimises the costs and risks of public debt.
However, the actual borrowing ratio in the fiscal year 2021/22 was 19:81 in net external and net domestic borrowing (which shows a lack of execution alignment); and (ii) the failure has also introduced some perceived sensitivity on full disclosures of information on public debt and borrowing, a requirement for countries that raise funds from the international debt markets.
Today, taxpayers and even lenders have limited access and little ability to interrogate borrowing decisions, something which has continued to fuel speculations on the credibility of public debt figures and underlying contracts.
Finally, communication of debt management operations is also another critical aspect of debt management. In the fiscal year 2019/20 budget speech, Treasury CS Henry Rotich announced the creation of an investor relations unit at Treasury ostensibly to enhance communications and transparency.
There has been little update(s) on its implementation. Ultimately, whether expunged from the National Treasury or the PDMO is ring-fenced (as captured in the law), getting public debt management right is one of the major steps in the restoration of public finances.
The writer is an investment analyst.