Time to restructure domestic debt


Time to restructure domestic debt. FILE PHOTO | SHUTTERSTOCK

Kenya is on the cusp of a fiscal implosion. A combination of weak fiscal trajectory and elevated debt service is rearing an ugly head on public finances.

In its latest assessment, the Parliamentary Budget Office (PBO) acknowledges that the country is facing significant debt vulnerabilities, citing an IMF Debt Sustainability Analysis for 2022 which established that Kenya is in breach of four of the six indicative thresholds for debt burden indicators.

While sustainability of public debt should also be assessed by the ability of a government to meet thresholds set on a group of indicators set by the IMF, it is also a process.

The process comprises a series of actions and functions aimed at sustaining first, the debt flows and then the borrowing and consequential debt service.

It identifies the minimum aspects that are critical to the debt sustainability process as: existence of a legal framework and institutional structure for debt management, a framework for coordination among the key players in the debt and communication of debt management activities, market development structure, and a staffing with requisite skills and necessary analytical tools.

Kenya has failed on the process due to the fact that the established institutional and operational arrangements for public debt management has not been implemented contrary to the Public Finance Management (PFM) Act of 2012.

This robust piece of legislation 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 PDMO all the operational decisions on borrowing and debt management and the day-to-day management of the Office.

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 and notwithstanding the oversight role of Parliament, the Office of the Auditor-General and the Controller of Budget.

The process aside, the fiscal trajectory is looking weak. The PBO’s fiscal projection for 2023/24 under both baseline and high growth scenarios are pretty flat at 17.4 percent of gross domestic product (GDP).

In the high growth scenario, revenue growth will be driven by the expansion in GDP. But still they cast doubt on the ability of the government to collect Sh3 trillion in total revenues in the next fiscal year.

I concur.

For most part, the Government gets it wrong with its macroeconomic forecasting as the basis for revenue projections.

There are instances when real GDP growth projections outperform government forecasts, but revenues underperform.

Overall, PBO sees fiscal balance (excluding grants) at sh927 billion and sh870 billion in both scenarios respectively.

As usual, whichever quantum of deficit will have to be entirely be funded through borrowings.

Kenya is also facing another mountain of challenge on the debt front: there is a $2 billion Eurobond maturing in June 2024.

With the current disorder in public finances, the country will have little choice but to refinance the debt irrespective of the global market conditions at the time.

As a consolidation measure, the PBO thinks privatisation of insolvent State-owned enterprises could help and can lead to proceeds worth Sh30 billion annually over the medium term.

I say that in addition to privatisation, the government should seriously consider restructuring domestic debt as another sustainability option.

Due to its steep costs, restructuring could have much greater impact in widening the fiscal space.

Domestic debt service accounts for 74 per cent of total public debt service even though it accounts for only 48 per cent of total debt stock.

In comparison, external debt, while accounting for 52 per cent of total debt stock, accounts for only 26 per cent of debt service costs.

By conventional wisdom, this implies that restructuring domestic debt can have a greater impact on alleviating the current debt-service burden.

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Note: The results are not exact but very close to the actual.