Why it will be hard for Ruto to raise debt ceiling
National Treasury Cabinet Secretary Njuguna Ndung’u at Parliament Buildings for the reading of the 2023/24 Budget Statement on June 15, 2023.
The National Treasury has pledged to stop frequent upward reviews of the government’s debt ceiling once lawmakers approve the proposed plan to switch the limit to a proportion of national economic output from a fixed amount.
President William Ruto’s administration in February backed draft legal changes initiated by his predecessor that will result in the country’s borrowing limit being capped at 55 per cent of gross domestic product from the current Sh10 trillion.
The use of an absolute number to set a debt threshold has in the past seen the Treasury frequently seek an upward revision to accommodate increased borrowing to plug the deficit in the budget when taxes fall short of the target.
For example, the current Sh10 trillion limit, approved by lawmakers in June 2022, came less than three years after the previous Sh9 trillion had been raised from Sh6 trillion in October 2019.
The Public Debt Management Office (PDMO) at the Treasury says anchoring the country’s debt-carrying capacity at 55 per cent of GDP will make debt management more sustainable by eliminating arbitrary changes to accommodate expenditures that were not budgeted.
“A country cannot adjust this debt threshold arbitrarily unless the country’s macroeconomic indicators, sovereign ratings, and economic classification is upgraded,” director-general for Public Debt Management Office at the Treasury Haron Sirima told the Nation.
“A deviation on either side [of 55 per cent of GDP] signals the need to take policy action,” he said.
The proposed limit of 55 per cent of GDP in net present value terms is in line with international standards for a lower middle-income economy such as Kenya which also seals borrowing at 70 per cent of GDP in nominal terms.
Present value public debt stood at 60 per cent of GDP last December, according to the most recent debt sustainability analysis report conducted by the International Monetary Fund (IMF) and the World Bank Group.
The higher levels than what the Treasury is proposing have elicited suggestions that the Treasury will table another proposal to raise the debt ceiling from the current plan of 55 per cent of the GDP which is still pending in the National Assembly.
Treasury, however, insists the present value of public debt to GDP was 55.4 per cent last December when guaranteed debts to parastatals, overdrafts at the Central Bank of Kenya, pre-1997 domestic debts, bank advances, supplier credit, and future interest payments are excluded.
IMF conditions
The Treasury is required to include all loans held by entities partly or fully funded by the State when computing the public debt as part of the conditions for the IMF’s current programme towards budgetary support to Kenya.
“The IMF/World Bank debt sustainability analysis indicates Kenya’s threshold to be 55 per cent debt to GDP on PV (present value terms) terms. I don’t foresee this threshold to change over the medium term due to the current level of nominal debt to GDP,” Dr Sirima said.
“The debt anchor is a threshold that provides an objective guide on the debt sustainability of a sovereign. It’s derived from measures on a country’s ability to pay even under extreme shocks” he added.
Kenya’s total public debt stock increased from Sh811.63 billion in the first nine months of the current financial year to Sh9.39 trillion in March — Sh610 billion short of the ceiling.
With Ruto’s administration targeting to borrow Sh718 billion in the financial year starting July to fill the hole in the Sh3.68 trillion budget, the current debt limit will be breached. This makes the case for the proposed switch to a cap based on a share of the GDP before June 2024.
“The proposed change to the public debt ceiling provides an appropriate guide for optimal level of public debt based on the country’s ability to pay,” Treasury Cabinet Secretary Njuguna Ndung’u wrote in the Budget Statement he delivered on the floor of Parliament last Thursday. “This is the debt carrying capacity that can be objectively assessed as well as provide directions on information on debt accumulation or reduction from time to time.”
The IMF and World Bank have classified Kenya as at a high risk of debt distress since 2020 as a result of a persistently large deficit in annual budgets in more than a decade, meaning the country is living far beyond its means.
Kenya ramped up borrowing under former President Uhuru Kenyatta’s administration, in which Dr Ruto served as Deputy, to build infrastructure, leading to a squeeze on its finances as the loans fall due amid criticism over the resulting debt burden.
Debt increased more than four-fold to Sh8.66 trillion under Mr Kenyatta, who invested heavily in a new modern railway and links as well as other mega infrastructure such as roads, from Sh1.79 trillion he inherited from his predecessor Mwai Kibaki.
Dr Ruto, who partly rode to power on a pledge to make debt a “last resort” in raising funds to fill holes in the budget and not to make the nation “slaves of debt from any place or any country”, grew debt Sh689.59 billion in the first six months in office.
A considerable share of the borrowing is, however, going into refinancing maturing debt amid plans to aggressively ramp up tax revenue receipts.
