CRA Makes Submission on Debt to Senate

The Commission made a presentation to the Senate on debt on Thursday 16th September in which it gave suggestions on how to mitigate the risk of debt distress.

The Commission made the following observations and recommendations:

1. Kenya’s debt has increased from 49 % of GDP in 2013 to 68% of GDP in 2020. Kenya’s debt dynamics need to be understood in the context of fiscal deficits. The country has been financing expenditure through high fiscal deficits in excess of 6%. Rising debt mirrors the fiscal deficit. The current debt position reflects our cumulative fiscal policy stance (Fig 1). Parliament plays a critical role in the approval of the budget and this is where vigilance is required to ensure that fiscal deficits are sustainable at the budget approval stage.

Budget deficits drive debt: Parliament should be vigilant at the budget approval stage.

2. The composition of external and domestic debt has changed and increased pressure on debt service: The share of commercial debt has increased from 22% to 36 % of total debt. Commercial debt attracts higher interest rates and a shorter maturity profile compared to concessional multilateral debt. This change in composition increases budget pressure on debt service.  The composition of domestic debt has also changed. The composition of domestic debt is important and has also changed over time. The share of long-term treasury bonds in total domestic debt declined from 71% in 2013 to a low of 61% in 2018. Long-term maturity debt (bonds) eases the pressure on debt service compared to short term treasury bills.

The share of Commercial debt in deficit financing has increased:

3. The rising debt and changing composition has seen a rise in debt service as a share of the revenue from 16% in 2013 to a high of 37% in 2018 and now stands at 32%. The current scenario can trigger a vicious cycle of debt dynamics and parliament needs to be vigilant in its budget-making and oversight role

Debt Service as a share of the revenue:

3. Debt service crowds out social and development expenditure and can have serious social consequences. Debt repayment is the first charge when determining the shareable revenue between the two levels of government. For Instance, Interest payments in the FY 2020/2021 absorbed 31.7 per cent of ordinary revenue up from 27.8 per cent in the FY 2019/2020 as shown in Figure 3. Interest payments also took up 4.4 per cent of the total economic output in the country in the FY 2020/2021.

 

4          When debt service is high there are fewer resources for other types of spending: High debt service reduces the equitable share available to both levels of government which in turn affects service provision due to delays in disbursement of resources to county governments and MDAs. High-interest payments are also likely to crowd out expenditures in key sectors such as health, social protection and other development spending. For instance, in FY 2020/21 interest payments at 495 billion are much higher than health expenditure at 207 billion and social protection at 34.8 billion.

Debt service is now higher than expenditures in key social sectors:

 Conclusion:

Debt is not bad and can fill important financing gaps. The CoK 2010, 211, 95 (b), (c), 214(1) gives parliament a critical role in budget making. Although Kenya is not in debt distress the risk has increased from moderate to high. To mitigate this risk we offer some proposals for consideration: 

  1. Enhance the revenue forecasting capability and align expenditures to available resources to reduce fiscal deficits our expenditure requires a deeper haircut to adhere to the EAC thresholds on-budget deficits in the medium term
  2. Lengthen the maturity profiles and restructure borrowing towards concessional external debt to reduce the amounts paid in debt service. This however can take a very long time, particularly for commercial lenders. The restructuring should include Treasury Bills to lower refinancing and rollover risk
  3. Debt problems are correlated with several other problems and it will be important to be vigilant and proceed cautiously particularly with regard to commercial debt. To mitigate the risk o debt distress Parliament could:
  • Set the bar for transparency and more openness in debt management, interrogate the annual borrowing plans question the plans and the interest rates at which the government is borrowing.
  • Interrogate the use of debt and ensure that the loans are for productive and tangible expenditures
  • Operationalize the Sinking Fund to manage debt maturities.

 Watch the coverage of the presentation here on CRA’s YouTube https://youtu.be/qBOfG-hChos

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