Budget Office calls for deficit caps to check rising debt

Legislators should introduce budget deficit caps for national and county governments to check Kenya’s spiralling debt, Parliament’s Budget Office has said.

The Treasury has been crafting budgets irrespective of revenues and used debt to plug the shortfall, a move that has resulted in the country’s debt ballooning to Sh2.3 trillion, which is 57 per cent of GDP.

“One of the ways of ensuring debt sustainability is by requiring the national and sub-national levels of government to spend within their means through introduction of budget deficit caps,” reads a report by the office set to advise legislators on economic matters.

The office said the move would pre-empt insolvency especially at the county governments, reduce wasteful spending and the need for debt financing at both levels of government. Kenya’s total debt has no cap but its external borrowing is limited to Sh1.2 trillion which can be reviewed by Parliament while guaranteed external debt is capped at Sh200 billion.

READ: State in debt after introduction of austerity measures

County governments have not started running budget deficits but are expected to start exploiting debt instruments such as bonds to fund development plans. Currently they have to rely on the national government to fill the gap left by their revenues. The bonds are to be guaranteed by the National Treasury and a default would see the debt position of the country explode as it takes over repayment of the loan.

The Capital Markets Authority has been urging the counties to issue project-linked bonds with some such as Nairobi declaring interest.

Indonesia has set its deficit cap at three per cent of GDP since 2003. Germany amended its constitution in 2009 to introduce a deficit cap of 0.35 per cent for the federal government by 2016 while the individual states in Germany will not be allowed to have any deficits starting 2020.

But economists hold that debt is good for Kenya which as a growing economy needs to inject capital to fund the growth.

“So long as it goes to productive sector there is no issue and in our case its for infrastructure development which will reduce our future production cost,” said Prof Joseph Kieyah. principal policy analyst at the Kenya Institute for Public Policy Research and Analysis. He however concurred that there is need for caps at the county government so to ensure they borrow responsibly when that opportunity arises.

Kenya’s debt has spiralled in the recent past as the country undertook capital intensive infrastructure projects. Current debt levels do not take into consideration funding expected to come from China for the funding of the standard railway gauge, estimated to be over Sh320 billion.

The Budget Office said the Treasury could be enticed into more borrowing when revised economic data for the country, commonly referred to as rebasing of the GDP, is released. Rebasing will see the country’s debt in comparison to the GDP drop without actual payment of the loans.

The debts will be passed on to the future generations which will hurt economic prospects, especially if the cash is not used for development expenses. The constitution demands equitable sharing of debt between present and future generation.

Kenya’s budget has been disrupted by demands for salary increments by civil servants and politicians. This has seen the government turn to using supplementary budgets to increase its borrowing limits to meet the new recurrent expenses.

The Treasury was urged to take up private public partnerships that see the capital coming from private investors who collect proceeds from the project to recover their investment. Inclusion of the private sector also ensures completion of the projects as the investors look to start collecting revenues.

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