Inside Treasurys fresh public debt management strategy

The National Assembly granted Treasury the green light to move Kenya’s borrowing ceiling to Ksh.9 trillion last Wednesday igniting the planning ministry’s revamped debt management strategy.

While the revision of the public debt ceiling to absolute terms has been the subject of criticism from various commentators, Treasury has backed the turnaround in fiscal stance to deliver on the much awaited fiscal consolidation.

In essence, the newly sort ceiling is meant to create the space for the refinancing of expensive debt and a shift in focus from domestic debt to external debt in effort to crowd in funding for the private sector and Small and Medium Enterprises (SMEs)

According to Treasury’s draft Budget Review and Outlook Paper (BROP) published last month, Kenya’s public debt is forecast to near the Ksh.9 trillion mark at the end of June 2024 at Ksh.8.9 trillion.

The projection hence calls for heightened prudence and fiscal discipline to be achieved through a combination of reduced spending and greater internal revenue mobilization.

Next expenditure is expected to hit Ksh.3.3 trillion or an equivalent 20.9 percent of Gross Domestic Product (GDP) in the 2022/23 financial year.

At the same time, Treasury estimates real economic growth to hit seven percent in the medium term on the back of greater productivity.

Even so, total revenue as a share of GDP is expected to slide to 17 percent or an equivalent Ksh.2.7 trillion over the period to mirror the government concerns on a slippage in revenue mobilization.

Further fiscal consolidation is expected to be backed by a strengthened current account balance which is expected to hit a low 4.6 percent by mid-2023.

Treasury’s fiscal plan is however prevalent to unprecedented risks including global volatility, currency depreciation and uncertainty in the pace of monetary policy normalization in advanced economies.

Greater revenue mobilization has until now been the key Achilles heel for government with the International Monetary Fund (IMF) having reclassified Kenya’s debt distress level from low to moderate an year ago on the back of years of missed tax collection targets.

While Kenya’s debt distress is yet to hit a ceiling, World Bank Chief Economist for Kenya Peter Chacha worries of risks to improved revenue collection on a shift in GDP contribution.

“There has been a disconnect in revenue mobilization with a decline in the growth of tax to GDP. We have seen the decoupling of the structure of the economy with a shift of growth towards lower contributory segments such as agriculture,” he said.

The regression in GDP contribution has in the past year been characterized in the decline of both income tax and the Pay As You Earn (PAYE) bit as Kenya’s private sector continues to take a hit from a deplorable macroeconomic environment.

More to the uncertainty in the execution of fiscal consolidation is the rationale for concessional funding which in essence extends the tenure of outstanding external debt at lower interest rates against Kenya’s reclassification into a low middle income country.

“It remains unclear why there is a shift towards concessional funding,” researches from Genghis Capital state in a note published on September 30.

According to compiled data from the firm, external debt from multinational institutions has fallen to 30.3 percent as of June 2019 while commercial financing has peaked to 36.3 percent over a similar period.

Kenya however maintains access to an approximated Ksh.77.8 billion ($750 million) in development policy financing (DPF) from the World Bank Group making for an avenue of limited concessional funding.

Genghis additional sights the running of balanced fiscal budgets as the best way to the sustaining of public debt.

“The next best rate is slimmer fiscal deficits on aggregate local currency terms and ordinary revenue reliant budgets”