World Bank ranking highlights Kenya’s debt, spending woes

Bad spending and management of debt are the biggest drawbacks to Kenya’s socio-economic growth, a new World Bank report showed.

Although Kenya ranked highly at position three overall in Sub-Saharan Africa behind Rwanda and Cape Verde, the bank’s latest Country Policy and Institutional Assessment (CPIA) for Africa showed that its debt woes and miss-match between expenditure and revenue collection remain big concerns. The CPIA assesses the quality of a country’s policy and institutional framework to foster sustainable growth, poverty reduction and effective use of development resources.

The CPIA consists of 16 criteria grouped in four equally weighted clusters; Economic Management, Structural Policies, Policies for Social Inclusion and Equity, and Public Sector Management and Institutions.

The CPIA ratings are crucial because they are used to determine the allocation of zero-interest financing and grants to countries that are eligible for support from the International Development Association (IDA), the World Bank’s fund for the world’s poorest countries.

The bank observed that Kenya’s fiscal policy remained expansionary in 2016/17 despite challenges with resources to finance programmes and projects.

Driven by a mishmash of higher expenditure and weak revenue performance, the country’s fiscal deficit widened in 2016/17 to nine per cent of GDP. “The size of total government expenditure relative to GDP climbed nearly four percentage points between 2001/12 and 2016/17, reflecting the growing importance of the public sector in the Kenyan economy and in underpinning growth,” the bank said.

“While development spending has been one of the main drivers of spending in recent years, transitional factors in 2016/17 — such as elections, drought response–related expenses, and structural factors such as interest payments and pension — made it challenging to rein in spending,” it added.

Kenya’s debt policy and management was also flagged as a weak point — limiting the country’s overall ranking. “In Kenya, the score was pulled down by two factors. One factor was the weak capacity of the Debt Management Office of the Treasury. Without adequate staff and clear leadership and accountability, the unit faces challenges in carrying forth its mandate. Reforms to strengthen the debt strategy have been pending implementation for several years,,” the lender pointed out.

Only last month the Treasury kicked off the recruitment of debt management experts, reflecting the country’s struggle to tame debt. About 20 experts are marked for recruitment with Treasury Principal Secretary Kamau Thugge saying they will provide guidance in determining borrowing ceilings for the national and county governments.

“Another factor was that in November 2016, the government of Kenya published the Medium-Term Debt Management Strategy for 2017/18 to 2019/20. Although on paper the strategy provides a framework for prudent debt management, it is not clear that it is being followed considering the sovereign debt trajectory that has kept increasing at a sustained pace over the past years” it further said, adding that the publication of monthly debt bulletins on the Treasury’s website appears to have been discontinued in 2017.

Last week, a Moody’s analyst warned that Kenya’s credit rating would come under pressure if it hit the maximum public debt level of 74 per cent of the gross domestic product.

Currently, the gross public guaranteed debt level amounts to 58 per cent of the nominal GDP, meaning it is only Sh1.38 trillion away from the Sh6.55 trillion level that would trigger a major concern on rating.

In a bid to reduce spending and restore stability in the country’s public finances, Treasury secretary Henry Rotich imposed tighter controls on government programmes.

“The government recently directed that no new projects should be started without the approval of the Treasury. The SWGs (sector working groups) are therefore advised to only consider new projects approved by the Treasury (with)… priority to the Big Four interventions and completion of ongoing projects,” Mr Rotich said in a circular.

Kenya’s CPIA overall rating was boosted by the Economic Management cluster, which the country scored highest at four, a drop from 4.3 in 2016.

Economic management factored in, monetary and exchange rate policy, fiscal policy, and debt policy.

Structural policies is the second highest performing cluster at a score of 3.8 points out of the possible 6. Trade, financial sector and business regulatory environment were factored in, in this cluster.

Policies for financial inclusion and equity, and public sector management tailed at 3.7 and 3.4 points respectively.