The IMF estimates that the pandemic will push up total public debt 69.9 percent of the GDP in 2022. FILE PHOO | NMG
Kenya should seek the release of the more than Sh1 trillion that
donors have signed to lend so that the country can stop paying
commitment fees that continue to raise its indebtedness.
This
is the advice of the International Monetary Fund (IMF) following its
recent release of nearly Sh75 billion to support the country’s budget
implementation following the crisis brought about by the new
coronavirus.
But gleaning from the Treasury debt
management documents, the issue of signed-for but unreleased funds is
not directly addressed.
The IMF is giving this advice
after noting that Kenya’s debt moved from a moderate to a high level of
distress, after a spate of borrowing from both external and internal
sources in recent years.
This is also only public debt
but there is also private debt that is also rising with some
international institutions, such as African Guarantee Fund, giving
guarantees to small and medium enterprises (SMEs) to give comfort to
commercial banks to restructure their loans to make them easier to
service.
“Kenya has about $10 billion [Sh1.06 trillion)
of committed but undisbursed official development assistance. To avoid
commitment fees on undisbursed funds and reduce reliance on commercial
financing, measures should be taken to unblock this low-cost financing,”
says the IMF.
The Treasury has committed to reducing
its external indebtedness especially the commercial type to cut the
costs of servicing it, but it remains relatively high and more so after
the recent borrowing associated with tackling the new Coronavirus
pandemic.
Kenya has recently not only borrowed from the IMF and the World
Bank but is also leveraging cheap liabilities to get more from other
bilateral and multilateral lenders.
Even the donors are
also encouraging the country to seek more of the concessional as
opposed to the nonconcessional debt to cut associated expenses.
“The
authorities are encouraged to further strengthen their debt management
capacity to manage and prepare for large repayments on commercial
borrowing. As part of this strategy, it is expected that the authorities
will have a strategy on near-term external refinancing and over the
next years, refinance loans at a longer maturity to limit refinancing
risks,” says the IMF.
“At the same time, concessional
borrowing should continue to play an important role in financing
investment projects due to its lower cost and longer maturity profile,
while non-concessional borrowing should be limited to finance those
projects with high social and economic returns.”
The
point is that Kenya can only achieve fiscal consolidation by reducing
the amount dedicated to servicing debt, which would, therefore, free up
cash for projects.
It would mean cutting all that
contributes to its indebtedness. The debt involves not just money it
directly borrows for repayment as the national government but also that
which it pays in fees and that which it guarantees its corporations and
SMEs to borrow or restructure their facilities.
“Delivering
on fiscal consolidation is essential to further reduce risks. At the
same time, the authorities are encouraged to expand the coverage of
public debt to include county governments, extra budgetary units, and
non-guaranteed SOE [State-owned enterprises] debt, and continue
improving public debt management and revenue administration, which will
be key to maintaining debt sustainability,” says the IMF.
The
multilateral lender notes that while Kenya’s public debt remains
sustainable, the downgrade in the debt risk rating is a consequence of
the impact of the global Covid-19 crisis which has made vulnerabilities
worse.
It notes further that “the pandemic has dampened
exports and economic growth, resulting in a breach of solvency and
liquidity indicators thresholds related to exports. This
notwithstanding, the authorities expect that Kenya’s debt indicators
will improve as exports rebound, once the global shock dissipates.”
The
IMF estimates that the pandemic will push up total public debt from
about 61.7 percent of the gross domestic product (GDP) at the end of
2019 to 69.9 percent in 2022 but could decline thereafter.
That
would be only marginally below the peak of 70 per cent, which is what
the Treasury has proposed and Parliament has approved as the maximum
public debt-to-GDP ratio in present value (PV) rather than nominal
terms.
“Under the baseline scenario, total public debt
as a share of GDP is expected to increase through 2022 on the back of
the Covid-19 crisis, and then gradually decline over the medium-to-long
term and remains firmly below the benchmark in PV terms. Public sector
debt is projected to increase from 61.7 percent in 2019 to 69.9 percent
in 2022, followed by a gradual decline. It remains strictly below the
benchmark of 70 percent of GDP in PV terms,” says the IMF.
Clearly,
that essentially means the Treasury can hardly talk about fiscal
consolidation or deficit reduction in the medium term without cutting to
the bone in view of Covid-19.
When the Treasury was
making its programme-based budget (PBB) in April, it appreciated the
impact of the pandemic on the public spending, but failed to delineate
the exact amount that it would need to handle the issue apparently
because it was not in a position to make a realistic estimate.
The
IMF has estimated that Kenya needs at least Sh223 billion in external
or hard-currency financing to plug the gap opened by the disease but the
Treasury had earlier said it was looking for Sh122.5 billion from
foreign donors.
The Treasury had planned, as shown in
the most recent Budget Policy Statement, to cut its fiscal deficit in
the 2020/21 budget to less than what it would be for the year ending
this month, but did not revise this to reflect the new realities brought
about by the new disease.
The Treasury had said that
the deficit would be at 6.3 percent but this now appears to have been an
overestimation. The IMF reckons that the fiscal consolidation target
for the year was “ambitious” even before taking account of the new
pandemic.
“As we finalise preparation of the budget for
the FY 2020/21, we are cognisant of our limited fiscal space occasioned
by revenue shortfalls and rising expenditure pressures.
“To
reverse this situation, the government will continue to pursue the
fiscal consolidation policy in order to provide and maintain necessary
balance between revenues and expenditures.”
It then
went ahead to project a 4.9 percent fiscal deficit for 2020/21, which is
now near impossible because the pandemic has forced the State to make
unprecedented responses to tackle it with adverse implications for
revenue collection.
“The objective is to ensure that
the overall fiscal deficit is kept under control and to a bare minimum
to safeguard macroeconomic stability and reduce the pace of growth of
the public debt. In this regard, fiscal deficit is projected to decline
gradually from the estimated 6.3 percent of GDP in FY 2019/20 to 4.9
percent of GDP in FY 2020/21 and further to around 3.0 percent of GDP
over the medium term,” said the Bretton Woods institution.
Even
when there are no major disasters or crises like that precipitated by
Covid-19, the Treasury has found it extremely difficult to meet its
stated fiscal consolidation targets which partly explains the
accumulation of debt.
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