The National Treasury has set in motion plans to increase the debt ceiling once again to afford the 2021/22 budget.
This is after the 2021 Medium Term Debt Management strategy released this week revealed that the government must increase the debt ceiling beyond Sh9 trillion to get the headroom to borrow the billions Treasury needs to finance the new financial year that starts in June.
The debt strategy notes that it will be impossible to fund the new budget for the 2021/22 and into the medium term if this limit is not increased.
“To accommodate the fiscal deficits in FY2021/22 and into the medium term, the statutory debt limit has to be expanded,” the document reads in part.
It notes that the government’s debt strategy formulation has been on a background of public debt fast approaching the statutory ceiling of Sh9 trillion as set out in the Public Finance Management Act, 2012.
Revise debt ceiling
“As a result, the implementation of this strategy may require the revision of the debt ceiling through the amendment of the PFM act based on future borrowing requirements,” the document notes.
In an exclusive interview with the Nation last week, Treasury Cabinet Secretary Ukur Yatani said that debt accumulation is the result of fiscal deficits and when it becomes necessary to increase the ceiling, Treasury will table that request in Parliament.
“If Parliament approves expenditures that will lead to borrowing beyond the Sh9 trillion debt limit, the National Treasury will request Parliament to expand the debt ceiling to accommodate the necessary additional borrowing as required by the PFM Act 2012,” he said.
The budget for the 2021/22 is Sh3.02 trillion, which is Sh216 billion more or a 7 per cent increase from the Sh2.81 trillion in the current financial year.
This expansionary budget will leave the country with a deficit of Sh937.6 billion (7.5 per cent of GDP).
External borrowing
This fiscal deficit will be financed by net external borrowing of Sh345.5 billion (2.8 percent of GDP), and net domestic borrowing of Sh592.2 billion (4.7 per cent of GDP).
Yatani noted that Kenya had also formally requested the Paris Club and non-Paris creditors including China to consider debt service suspension.
“We have signed the framework memorandum with the Paris club bilateral lenders for the DSSI and negotiations are ongoing with China,” Yatani said.
“The next stage is to negotiate and sign bilateral agreements once we have agreed on the debts that are eligible for service suspension,” the Treasury boss said, adding that once this is done, he will inform the public the amount of debt service suspension obtained.
Treasury said DSSI is credit rating neutral as it reduces the debt service obligation and spreads to outer years in a way that improves the sustainability of debt.
“Transparency will be a key aspect of this transaction,” he said.
65.6 per cent of GDP
Kenya’s stock of debt as at December 2020 stood at Sh7.2 trillion, which is equivalent to 65.6 per cent of the Gross Domestic Product (GDP). Total external debt was Sh3.7 trillion while the domestic debt was Sh3.4 trillion.
The Public Finance Management Act, 2012 sets the statutory debt ceiling at Sh9 trillion.
The World Bank and the International Monetary Fund (IMF) composite indicator (CI) for economic and institutional performance classify Kenya as a strong performer with sustainable debt but risks to sustainability have increased.
In the 2019/20 financial year, the net borrowing was Sh790.8 billion to fund the budget deficit. From this, net foreign financing was Sh340.4 billion against a target of Sh324 billion. On its part, the domestic financing was Sh450.4 billion against a target of Sh593.9 billion.
The debt office sees a silver lining in longer-term debt, with preference for concessional and semi-concessional external financing sources to reduce the growing refinancing risk.
The key indicators for measuring refinancing risk are debt maturing in one year as a per cent of total debt, Average Time to Maturity (ATM) and debt maturing on one year as a percent of GDP.
Maturity time
The debt management strategy says that the average time to maturity for both domestic and external debt improved from 5.7 years and 11 years in 2019, to 6.3 years and 11.2 years in 2020 respectively, implying lower refinancing risk.
“The newly contracted external debts in the year ending June 2020 had an average maturity and grace period of 26.1 years and 7.4 years compared to 15.3 years and 5.6 years in June 2019 respectively,” the document notes.
Treasury is also exploring various alternative financing options such as private placement, diaspora bonds, Islamic bonds (Sukuk), and issuance of sovereign green bonds over the medium term to finance climate friendly public projects.
Yatani defended the ongoing borrowing initiatives on grounds that Kenya needs the money to prop up the economy and pull it out of the recession brought about by the Covid-19 pandemic.
“In the last financial year, our budget was done with a normal economic situation. There was no Covid. There were no locusts there were no floods. So the projections were based on a normal life,” Yatani said.
But the Covid-19 pandemic derailed the plans and government had to increase borrowing to keep the fire in the economy burning.
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