Public debt grew by Sh1trn last year, Central Bank says

Public debt hit Sh8.2 trillion last December even as the National Treasury seeks parliamentary approval to increase spending by Sh126.3 billion over the next six months.

Latest Central Bank of Kenya (CBK) data shows the debt grew from Sh7.28 trillion as the government’s big appetite for loans continues.

While presenting the supplementary budget estimates for the fiscal year 2021/22 to Parliament last month, Treasury Cabinet Secretary Ukur Yatani sought MPs’ approval to increase expenditure by nearly Sh130 billion.

MPs last week held discussions with ministries, departments and agencies (MDAs) on their priority spending areas in the mini budget before tabling their reports to the House Budget and Appropriations Committee.

“The supplementary estimates have been prepared to take care of post Covid-19 related interventions, drought-related expenditure, payment of pending bills, salary adjustments, the general election, CBC infrastructure, changes in development partners funded projects and rationalisation of the budget,” Mr Yatani told MPs.

The additional budgetary allocations are set to pile pressure on public debt as the government enters the market to shop for new loans to plug the budget deficit.

In December, the International Monetary Fund (IMF) approved the disbursement of another Sh29 billion tranche to Kenya following a successful review of their 38-month Sh256 billion loan agreement.

Last month, the government went shopping again for a Sh75 billion loan through a 19-year new infrastructure bond whose sale will end tomorrow.

Going by past trends, CBK could borrow more than the advertised amount should it receive more bids.

For instance, in the August issue of a similarly sized infrastructure bond that was oversubscribed by 201 per cent, CBK accepted bids totalling Sh106.75 billion, way above the advertised Sh75 billion.

This comes even as the Parliamentary Budget Office (PBO) projects the stock of public debt to hit Sh8.8 trillion by June, just Sh200 billion shy of the Sh9 trillion statutory debt ceiling that would leave little room for borrowing to finance the budget for the 2022/23 financial year, and rise further to Sh10 trillion by 2024.

Treasury is also planning to borrow Sh846 billion in the 2022/23 financial year, according to the 2022 Budget Policy Statement.

The majority of this will be locally sourced, which the office has flagged for its high interest rates as well as the ripple effects of locking out businesses from accessing loans from banks who prefer lending to the risk-free government.

“Already, there is a heavy dependence on the domestic market for government financing as can be illustrated by deviations from annual strategies in favour of domestic financing.

Whilst this is critical for domestic market sustainability, if it is not coupled with adequate market reforms, could exert pressure on the domestic financial market and increase borrowing costs,” it says.

The heavy borrowing comes at a time the government is also looking to do away with the nominal value debt ceiling system in favour of a debt anchor.

Treasury told IMF it would seek Parliament’s intervention to amend the Public Finance Management (PFM) Act, 2012 to do away with the Sh9 trillion ceiling and instead adopt a debt anchor of 55 per cent debt-to-GDP (gross domestic product) ration.

“We seek to move away from our debt ceiling and introduce a credible debt anchor to crystallize our policy intention of reducing debt and maintaining debt sustainability,” the Treasury said.

“The credibility of the new framework will anchor expectations for all stakeholders around the government’s intended debt reduction path and will benefit from our commitments under the EFF/ECF-supported programme with the IMF,” it said.

This comes despite Kenya breaching many of the debt sustainability thresholds, indicating a gradually worsening debt burden even as annual debt servicing costs, which are expected to hit Sh1.17 trillion by June, are projected to rise to Sh1.36 trillion next year. This will be 63 per cent of the projected revenue collected during that time.

For instance, despite a debt-to-GDP ratio threshold of 55 per cent, PBO projects Kenya’s debt to hit 64.2 per cent of the GDP by June and 63.4 per cent next year.

The debt-to-revenue and grants ratio, whose threshold is 300 per cent, is projected at 370.8 per cent and 348 per cent during the same period.

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