Repositioning domestic and external borrowing requirements: The 2023/24 Budget is still alive, but the government gives a nod to hive off Sh270 billion of planned deficit financing from domestic borrowing to external borrowing, retaining the headline Fiscal Deficit at Sh718.9 billion. It gets bookish, but this article argues in summary that Kenya would be better off cutting public spending by the reduced domestic borrowing (of Sh270 billion, as planned) but not to replace it with external borrowing.
There are economic benefits but also hard constraints. After a government in one year racked up debt to a gross of Sh10.19 trillion, above the statutory limit of Sh10 trillion by Sh189.53 billion, no one can guarantee, under current macro policies, that spending can constrain the borrowing limit of Sh10 trillion, given lawmakers pitched a new limit at 55 per cent of GDP.
The near-term impact of converting the Sh270 billion to an expenditure cut, re-directing it to increased private sector lending (not credit to government) would be higher output, employment, lower inflation, money in the pockets of voters, and increased revenue for KRA, averting external borrowing pressures of spiking interest rates and weakening exchange rate of the shilling.
Reduction would hit two birds with one stone: Improved public finances from 2023, and the kickoff of economic recovery in the short-to-medium term of between five and eight years. Stronger public finances could shrink indebtedness (narrowing the primary deficit- fiscal deficit less interest payments).
This strategy is understandable: To burn external borrowing bridges behind our ruined public finances allows the KK regime to sort out historic transgressors against public finance law, and not to become a transgressor itself. The government’s intention to re-build a mini-bridge to external borrowing on Finance Act 2023/24, shifting the composition of funding of the budget deficit, amounts to pointing an excellent opportunity in the wrong direction — more external borrowing.
Furthermore, it sounds too good to be true, pregnant with unintended consequences as to what new costs will pass to present and future taxpayers, and with what legal hurdles. After heated debates, passage in Parliament, enactment, and on-going tussle in the courts, building new bridges is supposed to happen in the budget process, or the courtrooms now.
It is a query for lawyers whether the uncompleted process can be re-invented to slant deficit financing to external financial markets while retaining the overall deficit at Sh718.9 billion. The government promises a kinder stance to private sector access to easier and cheaper loans.
The casino for external borrowing
None can deny the biases Africa faces from the moribund Washington twins — IMF and World Bank — with the former steeped in austerity at all costs, even economic theory: and the latter recently used by someone its down-time to punish Uganda on LGBTQ. Nor are there angels among International Credit Rating Agencies (CRA) that junk Africa’s sovereign credit rating assessments left and right, even for potential economic giants. Top banks flying Africa’s flag also undertake pretty stiff murky lending behind closed doors.
But UNDP research reveals CRAs’ discriminatory ratings on sovereign bonds in Africa’s states (such as South Africa, Nigeria, and Egypt) are suspect, coated in subjective assessments forcing abnormally high yields on bond issuances. According to its report, Kenya is paying an excess of Sh160 billion on sovereign bonds in domestic currency while it could have access to Sh312.5 billion (US$2178 million) if fairly rated.
These opportunities are wasted, thanks to the likes of Moody’s and Fitch ratings and investors who threatened, on August 2, that Kenya’s bond buyback plan amounts to debt default. Yet, it is inescapable that our own domestic policy undertows ineptitude, inconsistency, and corruption, by people knowing too well that we walk on thorns in global financial markets, has a hand in it.
Self-inflicted errors despite elegant advice
So, no. It is not the moneybags that are solely worrisome. We muddy our choices. The key idea to hive off part of the specific Budget 2023/24 deficit financing earlier assigned to domestic borrowing, reallocating it to external financing shopped from diverse lenders (we’ll see who they are) in order to be kinder on domestic interest rates and loans to the private sector, deserves to go under the microscope.
Recent experiences with the likes of Eurobond and syndicated loans resurrect the horrors of poor accountability and public finance in the doldrums. As I have argued repeatedly, the Kibaki regime proved twice in a decade (2002-2013) that fiscal policy can work with monetary policy to propel growth and prosperity. Yet, Kenya in the two regimes succeeding him ripped into pieces credit markets with rate hikes.
To be fair, the KK regime gave early hopes in 2023, of seeking commitments from commercial banks to keep rates at about 10 per cent. Within months, rates peaked as prioritised its own domestic borrowing requirements to the point of offering such high premiums that financial sector players salivate at government securities offering gross rates reaching 20-22 per cent.
This sharply tightens monetary policy. The rates have little to do with appropriate monetary policy and could be emasculating the CBK’s Monetary Policy Committee (MPC) policy rates.
Should markets be driven by government borrowing requirements? One clear contradiction is that CBK’s recent spate of rate hikes (now paused) cannot even remotely be relevant under any theory, with inflation falling simultaneously.
The framework is no better on the fiscal side. Taxation is often irrational and toxic, with leadership gleefully promising more of the same (fiscal tightening) and claiming our taxation is progressive, fair, and efficient.
No, it is not. Listening carefully to US Ambassador Meg Whitman’s latest advice at the 8th Devolution Conference in Eldoret, she spoke of missed opportunities, and corruption, with sympathies for investors eyeing Kenya’s workforce that remains unemployed.
Yet, it’s ‘the best in the world’, according to the US envoy. Alternatively, compare contributions by major categories Personal Income Tax (high) against Corporate taxes (low- and much underpaid, or illicitly siphoned abroad) and Consumption Taxes like VAT (high) and Other taxes (high). The fiscal stance is blind, inviting mass unemployment, recession, and increased poverty. Purring private sector-led growth, based on the business cycle, remains the only path that can revive growth and generate investment, output, employment, and revenues.
Spot the differences?
Finally, take a bite at the deficit plan maintaining the overall fiscal deficit at Sh718.9 million. On its trail is Sh1.2 trillion borrowed in the first nine months of the KK regime, mostly from IMF and World Bank, despite election pledges to rein in borrowing.
The initial deficit proposed for 2023 was 4.4 per cent of GDP – with domestic borrowing (Sh586.5 billion, 3.6 per cent GDP) and external borrowing (ShSh131.5 billion, 0.8 per cent GDP). It is proposed to reduce the domestic borrowing from Sh586.9 to Sh316 billion, releasing Sh270 billion to drive domestic lending to the private sector at lower interest rates ex-post.
Excellent for real economic recovery and outlook, it is the foray into external financial markets to fill the gap of Sh270 billion that erases the potential benefits of the new measure. The switch/reduction in domestic borrowing should be converted to a deficit-cum expenditure reduction. It should be announced, even to the financial sector, as policy, an opportunity to reduce spending as a whole, by Sh270 billion, with a guideline for banks to sweep it as credit to the private sector.
How to embed the spending cut of Sh270 billion
In the simulation of the table, the Fiscal Deficit would fall to Sh499.2 billion. The shift in borrowing to external markets would be abandoned as it fails Wanjiku’s best interests, replete with abuses and loopholes too problematic to unearth from back-footed Government officials and yield-seeking financiers. The table on Page 18 simulates fiscal spending as currently planned (Sh3.663 trillion) versus holding spending at last year’s planned spending (the base 2022 fiscal spending was Sh3.394 trillion).
The difference is a spending cut of Sh269 billion, surprisingly equal to the Sh270 billion of the reduction in domestic borrowing the government proposes. So, we call it a deficit-cum-expenditure reduction.
To realise it, keep the domestic credit to government un-borrowed, but convert it to private sector lending. The Adjusted Deficit would fall to Sh499.2 billion. The Sh269 billion deficit reduction would amount to a mere 7.93 per cent of spending. Simulated for 2024, the Adjusted Deficit-cum-Expenditure cut would be Sh597.8 billion leaving an adjusted Budget Deficit of Sh163 billion from a high of Sh760.8 billion in spending.
Dr Wagacha, an economist, is a former Central Bank of Kenya chairman and adviser of the Presidency