New Kenya debt ceiling won’t fix spending or revenue woes

Kenya’s Daily Star has reported that the parliamentary budget committee is considering a ceiling of KSh12trn shillings ($105bn), and a long-term limit of KSh15trn. The current debt limit of KSh9.1trn compares with a current debt level of KSh8.2trn.

Kenya is in a “dire” position in terms of debt-service costs as a share of revenue, says Reginald Kadzutu, CEO at Amana Capital in Nairobi. The main problem, Kadzutu says, is consistent overspending relative to revenue collection. Kenya has run on average a 40% revenue to expenditure deficit since 2013, he says. “If they cannot get that under control, borrowing is going to be the norm,” which is “unsustainable,” he says. “The immediate solution is to restructure the debt”.

That’s politically unlikely in an election year.

• “The most compelling way to reduce debt is to slash spending, but experience has shown that most budget adjustments err towards increase,” says Churchill Oduor, an economist at IC Asset Managers in Mauritius.
• Public-private partnerships, he adds, are one possible way to cushion against debt sustainability concerns.

New anchor

Finance minister Ukur Yatani in December wrote to the IMF that the country aims to move from a monetary value debt ceiling to a medium-term anchor of 55% of GDP. He did not give a timeframe for adopting the target.

Such an anchor would indicate a tightening of fiscal policy as the current debt is estimated at around 62% in present value terms, says Mark Bohlund, senior credit research analyst at REDD Intelligence in London.

But it is “unclear” how this medium-term debt anchor would have a stronger influence on fiscal policy than the medium-term fiscal frameworks that have been in place in one form or the other since 1998, Bohlund argues.

“These frameworks have all projected a reduction in the budget deficit over the medium term but these plans have not been realised over the past decade,” he says. Fiscal decentralisation of spending to county governments has added substantially to recurrent expenditure even as government revenue has fallen relative to GDP, he adds.

• Kenya is “far from the debt distress currently plaguing peer countries like Ghana and Zambia but it is clear that a correction in fiscal policy will be needed” to avoid Kenya ending up in a similar situation in the medium term, Bohlund says.
• “Such a change is likely to be far down the priority list of the main contenders of the August presidential elections.”

Failure to adjust the debt ceiling from the current limit would mean that the budget deficit for the upcoming fiscal year would need to be slashed to about 3.0% of GDP, Irmgard Erasmus, senior financial economist at Oxford Economics Africa in Cape Town, writes in a research note. This would have “severe repercussions for growth, public sector wages, and debt servicing capacity,” and stifle the funding needed to complete President Uhuru Kenyatta’s legacy projects, she adds.

• Erasmus expects that the government will be able to push through a debt-ceiling increase, despite opposition from deputy president William Ruto, a candidate in the August presidential elections.
• Still, the politicisation of the issue in this election year is likely to “deepen pre-existing concerns regarding Kenya’s debt sustainability among investors and rating agencies,” Erasmus writes.

Bottom line

A new debt limit won’t achieve anything until spending is reduced and revenue collection improved.