Pressure Piles on Treasury to Cut Public Debt

Business Daily (Nairobi)

John Gachiri

4 April 2011

Kenya’s public debt soared to more than half the total value of the national economy between June and December in a development that will pile pressure on the Treasury to reduce government spending to sustainable limits.

The national debt jumped by Sh93.8 billion to a record Sh1.3 trillion in the first half of the financial year amid lower-than-targeted revenue collections and increased costs incurred in dealing with the drought situation and implementing the new constitution.

The new debt level is equivalent to 51 per cent of the gross domestic product up from 48.1 per cent as at June 2010, according to the December monthly economic review report released last week by the Central Bank of Kenya.

The need to jump start economic growth which stalled in 2008 due to post election violence and global financial crisis pushed Treasury into deficit spending to finance a Sh25 billion stimulus programme.

Analysts however say the government must cut back public debt to lower 40s as a percentage of the GDP to assure buyers of Treasury securities that the loans will be repayable in the long term. Joseph Kieyah, the head of private sector development division at the Kenya Institute of Public Policy Research and Analysis (KIPPRA), said re-payment of external debt was particularly burdensome as it represented net cash outflows from the economy.

“Internal debt may not be a problem because the money flows locally,” said Prof Kieyah.

Treasury spent Sh3.5 billion in paying interest on the public debts in the six months as it was forced to borrow Sh62.4 billion from the domestic debt market and Sh12.4 billion from international lenders.

Total foreign debt is valued at Sh599.2 billion, while the domestic debt stands at Sh720.3 billion.

Repayment of the national debt has also become more expensive as the Shilling’s exchange rate has depreciated to mid-eighties level driven by unrest in oil producing countries.

“More tightening will be needed although we expect that this will be gradual, and governed by the simultaneous removal of fiscal stimulus,” said head of research for African region at Standard Chartered Bank, Razia Khan, following Central Bank’s decision to raise its policy lending rate by a quarter percentage point to six per cent on March 22.

Prof Kieyah said Treasury should regularly assess its ability to pay back public debts without being forced to cut development funding.

“Some of this money would have gone to health education and building roads,” said Prof Kieyah.

Infrastructure spending is key for economic growth and slowing investment in this sector jeopardises the overall economic growth.

“If you cannot build highways where will the economic growth come from?” posed Prof Kieyah.

In a Joint IMF/World Bank debt sustainability analysis report dated January 14, the Bretton Woods institutions also cautioned against unchecked borrowing.

“The sustainability of Kenya’s debt depends on macroeconomic performance and a prudent borrowing strategy. The projected investment in infrastructure and the assumed improvement in the investment climate would be crucial to sustaining strong exports and GDP growth,” said the report.

Chief executive of Prime Bank, Bharat Jani, however said pressing government expenses leaves Treasury with limited headroom to trim expenditures.

Revenue authorities

“With the revenue authorities not meeting their targets so far by Sh31 billion and assuming this will continue for the rest of the year the demand for local borrowing will increase,” said Mr Jani, adding that this will put pressure on interest rates which in turn will crowd out private sector borrowing in favour of public debt.

Countries in the Euro zone have seen interest rates on treasury securities climb as investors doubted their ability to repay their public debts.

Greece, with a debt ratio to GDP of 121 per cent and Ireland (66 per cent) have had to turn to the IMF and European Central Bank to source for emergency funding.

Portugal, whose debt ratio stands at about 76 per cent, is also seen as a likely bailout candidate.

But a country like Japan which has a strong export and manufacturing base has survived market speculation without suffering volatility in borrowing costs even with a debt to GDP ratio of 200 per cent.

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