Public debt limit is a half-step
The National Assembly recently proposed amendments to the Public Finance Management (National Government) Regulations of 2015. The upshot of the amendment will see a change in the public debt limit from ’50 percent of Gross Domestic Product (GDP) in net present value terms’ to ‘nine trillion shillings’.
Let us unpack the technicalities. The back-of-the-envelope norm of calculating ‘simple debt sustainability’ ratio usually implies dividing the gross public debt by the nominal GDP. As at June this year, with gross public debt at KES 5.8 trillion and nominal GDP on a four-quarter rolling basis at KES 9.3 trillion, this ratio was at sixty-two percent. However, some of the external debt from the multilateral and bilateral donors are incurred at concessional terms with grant elements.
Therefore, the net present value terms discounts at a flat rate of 5.0% percent all future debt service payments as a percentage of GDP. As at June this year, it is estimated Kenya was at the brink at forty-nine percent. Ploughing deeper into the draft 2019 Budget Review and Outlook Paper, one cannot fail to notice the glaring goalpost shift to a threshold of ’70 percent of GDP in net present value terms’; at best, laughable and at worst, dents credibility. This, in my view, births Treasury’s Damascene momentto tweak the public debt limit to an absolute figure.
Nonetheless, the proposed amendment is subject to approval by National Assembly. Section 50 (2) of the parent legislation, Public Finance Management (PFM) Act of 2012, stipulates that public debt limit will be set by Parliament. Focus will now shift to the Committee of Delegated Legislation to submit a report to the august House on its recommendation of the proposed amendment.
At the baseline, the proposed public debt ceiling is likely to be breached by June 2024 if the financing deficits targets are anything to go by. However, I remain sceptical that fiscal indiscipline which has played out in recent years will suddenly evaporate. Therefore, we are likely to breach the debt ceiling by June 2023. Having said that, my view is that the public debt ceiling will not be cast in stone but will be dynamic as is the case in the US. A potential downside to this is that there could be unnecessary brinkmanship between the Executive and the Legislative arms of the government whenever there is a legitimate need to raise the debt ceiling.
What is quite telling in this public debt ceiling turnaround is in order for Kenya to continue accessing concessional funding from multilateral and bilateral donors. Some context at this point. In September 2014, Kenya acquired a middle income earner status and as such, concessional lending has been slightly on stringent terms. This explains the shift of external debt composition with multilateral loans declining from 53 percent as at June 2014 to 30 percent as at June 2019. On the other hand, commercial financing, that is from Eurobonds and syndicated loans, has jumped from 21 percent to 36 percent in the same period.
In the last fiscal year, Kenya received USD 750 million World Bank development policy financing and there is pregnant hope that a similar disbursement will be disbursed in the current fiscal year. I posit that Treasury’s recent posture could be a residue of this disbursement and I stand to be proved wrong. Nonetheless, media reports indicate that Treasury intends to retire all commercial loans. It remains unclear how this (strategy and timeframe) will work out and the next medium term debt strategy will be worth nitpicking for possible clues.
From where I sit, debt limit alone cannot be the cure-all of fiscal indiscipline. Two things should also go in tandem.
First and foremost, the role of the National Assembly in budget affairs cannot be gainsaid. Unless we have balanced budgets as the best case, or narrowing budget deficits in absolute terms as the next best case, we will keep recalibrating upwards the debt ceiling. Recently released report by the Parliamentary Budget Office show positive strides towards that direction. Notably, the report decries the challenges in implementing the numerous budget projects and emphasizes on efficiency gains as opposed to additional funding. The recent indication by National Assembly that it will be monitoring projects on a quarterly basis is also a step in the right direction. To help curb rising fiscal deficits in the future, there should be a deliberate action to have fewer public projects that are viable as opposed to countless projects that could potentially end up stalling because of inadequate funding.
Secondly, there is a cloud of opacity on external debt which is not the case with domestic debt. The financial terms of the hitherto biggest public capital project, Phase I of the Standard Gauge Railway (SGR), remains a matter of speculation. In addition, there is usually informational lag concerning syndicated loans. I applaud that Treasury would want to inject an air of openness regarding public debt. To walk the talk, there is need to make public the debt register. Granted, the repealed External Loans and Credit Act had such a provision but there should be legislative amendments to re-introduce it in a different format.
The hard coding of public debt limit is a giant leap but unless there is accompanying budget reforms and transparency of external debt, Treasury is squaring a circle.