Kenya: Treasury Mulls Debt Ceiling Boost As the Coffers Run Dry

5 January 2021

Kenya's debt ceiling is set to cross the current Sh9 trillion as the National Treasury faces one of the most challenging moments of preparing the 2021/22 budget amid revenue constraints.

Sources at the National Treasury Monday told the Nation that the new limit could be in the region of Sh12 trillion as per the proposed amendments to the Public Finance Management (National Government) Regulation.

The law changes are expected to be introduced once Parliament resumes from the long Christmas recess next month.

National Treasury Cabinet Secretary Ukur Yatani did not respond to our enquiries on the proposed amendments to increase the ceiling.

Read:Year of debt pain: Digging Kenya out of financial hole

However, Kikuyu MP Kimani Ichung'wah, who chaired the National Assembly's Budget and Appropriations Committee (BAC) that approved the 2019 amendments to raise the ceiling, said that the government has no alternative but to borrow.

"Unless they increase the debt ceiling by amending the regulations, the country will not have a budget," Mr Ichung'wah, an accountant, said.

The proposal to raise the debt ceiling comes in barely two years of Parliament voting to amend the regulations to increase the country's debt ceiling from the then 50 per cent of the gross domestic product (GDP) in the net present value (NPV) to the numerical figure of Sh9 trillion.

Accumulated public debt

Since November 2019, when the regulations were amended, the country has already accumulated public debt in the region of Sh8.5 trillion.

This means that the government can only borrow more to finance the 2021/22 budget by either amending the regulations or risk breaching the ceiling as Kenya Revenue Authority (KRA) continues to miss revenue targets.

In the first quarter of the 2020/2021 financial year, KRA recorded a Sh317 billion shortfall in tax revenue, a 15 per cent drop from what was projected by National Treasury as effects of Covid-19 took a toll on the economy.

By the time Parliament was voting to increase the ceiling, Kenya's public debt stood at Sh5.81 trillion, about 61.8 per cent of the GDP, which was higher than the 50 per cent threshold as per the PFM regulations.

At the time, the government was projected to borrow Sh640 billion to plug the hole in the Sh3.02 trillion budget -- meaning that had the MPs shot down the proposal, the government operations would have been seriously affected.

The proposal to increase the ceiling will be coming against a backdrop of the Public Debt Management Authority Bill, 2020 that seeks to regulate the national government's borrowing habits.

Manage public debt

The Bill by Nambale MP Sakwa Bunyasi, currently in the National Assembly, seeks to establish the public debt management authority as an independent body to manage public debt in the country at both levels of government.

The proposed authority seeks to succeed the public debt management currently domiciled at the National Treasury.

ANC leader Musalia Mudavadi has previously stated that it will not be surprising if the government came up with plans to raise the ceiling to accommodate the many loans that it wants to borrow to finance the various ambitious projects it is undertaking.

"Do not be surprised that most likely we will have a motion on the way to raise the ceiling again. It is coming," Mr Mudavadi said on December 13, 2020 at the Ofafa Jericho Friends Church in Nairobi's Makadara Constituency.

The rapid increase in the country's public debt has been due to the ambitious programmes that the government has continued to undertake.

For instance, the government is required to borrow more to plug the over Sh841 billion deficit that exists in the Sh3 trillion budget for the current financial year.

The estimates unveiled by Mr Yatani in the National Assembly in June 2020, shows that the fiscal deficit is to be financed by net external financing of Sh349.7 billion.

Domestic borrowing

There is also domestic borrowing which is projected to increase from a provision of Sh222.9 billion as per the Budget Policy Statement (BPS) of 2020, to Sh486.2 billion.

According to the Parliamentary Budget Office (PBO) that advises Parliament and its committee on budget, tax receipts are expected to decline in 2020/2021 financial year.

This is due to the impact of the Covid-19 on economic activities as well as the tax measures that were implemented to cushion Kenyans from the effects of the pandemic.

"Given the impact of Covid-19 pandemic on revenue mobilisation, exports, production and other contingent liabilities vis-à-vis increasing expenditure demands, there is a high likelihood that fiscal consolidation measures will be hard to adhere to," PBO says in its analysis of the 2020/2021 budget estimates.

PBO further warns that the country's debt distress levels could move from moderate to high as stated by the International Monetary Fund (IMF).

"There may be a need to revise the medium term debt strategy and related assumptions, in order to effectively mitigate against any risks that could jeopardise debt sustainability," PBO says.

Breach debt ceiling

Late last year, budget experts warned that Kenya is likely to breach the debt ceiling by early 2022 if the rate at which it is borrowing to support its budget and finance ambitious capital projects is anything to go by.

But it now emerges that this is likely to come sooner.

The International Budget Partnership-Kenya (IBPK) particularly noted the threat posed by Covid-19 on revenue collection to finance the budget.

IBPK Country Manager Abraham Rugo noted that the country's biggest problem is that the revenue has not performed as projected in the 2020 BPS, which essentially opens the window for borrowing.

"At this rate, breaching the debt ceiling is a looming possibility because the country is surviving on loans but wants to continue with ambitious projects," Dr Rugo says.

"Everything that can go wrong from a fiscal policy standpoint is going wrong. The only thing that seems not to take the heat is the government expenditure," he adds.

IBP Kenya senior researcher John Kinuthia notes that if the trend continues, KRA may collect just under Sh1.3 trillion from taxes in the current financial year compared to the projected Sh1.57 trillion, paving the way for increased borrowing from the local and external market.

"The shilling has heavily depreciated. With the external debt being dollar dominated, it means that every time the shilling depreciates, our debt bill is bound to go up because the National Treasury has to buy dollars and other foreign currencies including the Euros to pay those the country owes money," says Mr Kinuthia.

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