Five questions on Kenya’s new debt policy

The national treasury wants parliament to ratify a debt anchor that will guide the borrowing limits pursuant to the Gross Domestic Product (GDP) instead of the current numerical ceiling of KSh10trn (around $72.2bn).     

The debt anchor, whose debate started in 2022 but flopped, has been proposed at 55% of GDP. Kenya’s debt distress shifted from low to high levels between 2017 and 2022 when debt stock hit KSh9.3trn, with the current debt stock standing at 62%.  

But since the current debt stock is already above the targeted 55%, the anchor provides a leeway for the regime to continue with the breaches unhindered in the short term as it seals budget gaps through fresh loans. 

Continuing with the breaches would not have been possible with the current numerical ceiling unless parliament moves it upwards above the KSh10trn.     

Kenya’s present debt stands at KSh9.4trn, meaning there is only a headroom of about KSh600bn. The budget deficit in the next financial year is forecasted to stand at KSh720bn.     

Although the treasury has defended this plan as workable and part of debt management, there are still grey areas that will be crucial should the proposal go through. 

The Africa Report tries to answer five key questions on the new mechanism the treasury is seeking to put in place.     

Will parliament’s role in drafting the budget diminish?

At the moment, parliament’s role in controlling Kenya’s debt level is primarily to keep the deficit in check and adjust borrowing limits. 

If implemented, the new debt anchor policy will see legislators’ power of changing debt ceilings considerably slashed, since the official GDP figure, the key metric in the policy, will be the main determinant.  

Lawmakers will still be controlling budget figures, which they can either ratify or decline depending on the available borrowing headroom measured against the GDP.  

But rejecting a budget will be a tall order considering that President William Ruto’s Kenya Kwanza currently outnumbers the opposition side, and will find it easy to ratify any bill before the House.  

“I think it (the policy) is changing rather than eliminating the role of parliament,” says Churchill Ogutu, an economist and analyst at investment firm IC group. 

“And even as they do their analysis, they can tell whether we are off track or on track, and based on that we can see some element of intervention by parliament.”      

In case of a breach, what would be the remedy?

The Public Finance Management Regulations of 2015, which governs government finances, set the ceiling at 50% of the GDP. At the current 55% debt-to-GDP ratio, Kenya has already breached the limits, with little clarification on how parliament will avert further breaches. 

Worse, there is already an early indication that the government will continue borrowing in the next 2-3 fiscal years to support the budget amid revenue shortfall, placing Ruto in a tight position to achieve lower debt levels as aspired within his first term lapsing in 2027.     

The National Treasury Cabinet Secretary Njuguna Ndung’u is expected to play the accountability role in ceasing the breaches. He will be required to explain to parliament, the general public, and the country’s lead partners why the target is not met.     

This, therefore, implies that the executive bears more control in addressing the breaches. Parliament might still offer advisory interventions through the budget office. 

“Basing our debt as a percentage of GDP is a perfect proposal because it gives us the responsibility of improving our GDP,” says Kuria Kimani, Molo lawmaker and chairperson of the Finance and National Planning Committee. 

“The only thing I don’t agree with is why 55% when we know that 55% is not realistic,” he adds, stressing that the limit needs to be higher.     

His sentiments echo the worries of Ndung’u who told the Budget Committee on 28 April that by capping debt capacity at 55% of GDP, the treasury is “tying its own hands” due to the already saturated debt capacity and increasing investors’ flights.     

The treasury is signalling a wait until 2026 for it to start witnessing any improvement in debt sustainability indicators after the settlement of major bond maturities in 2024 and 2025.   

Will Kenya get its GDP right?

Parliamentarians have repeatedly expressed concerns that the new policy could push the government to manipulate GDP figures to favour unhindered borrowing, something that the treasury has vehemently denied.     

“I don’t think you need to doubt our GDP figures,” Principle Secretary (PS) for National Treasury Chris Kiptoo tells The Africa Report after being summoned by the Finance and National Planning Committee to deliberate on the upcoming budget. “Parliament will still have a role to play through the budget-making process.”     

Inflating economic figures is only possible if the metrics of measuring GDP are altered. The official economic performance by the Kenya National Bureau of Statistics (KNBS) will be used in the debt anchor policy.    

“This (debt anchor) is best practice and it is not something Kenya is coming up with without our proper experts. The world bank, the IMF have all recommended it, and this is universal. Don’t shy away from this and don’t doubt the GDP numbers,” says Kiptoo.     

Kenya had a slow GDP growth rate of just 4.8% to KSh13.4trn in 2022 compared with 7.6% in 2021. The growth rate, which is expected to increase in 2023, still lags behind pre-Covid levels.     

How will Kenya’s debt levels be affected?

A successful shift to a debt anchor will see the government only representing its debt stock as a percentage of the GDP in Present Value (PV) terms.     

The current KSh9.4trn debt will, therefore, be converted to a percentage depending on the fluctuation of the economy. If the debt stock grows at a slower rate as the economy improves faster, the debt-to-GDP ratio will decline gradually.     

In 2022, lawmakers under the Jubilee regime raised the debt ceiling to KSh10trn from the previous KSh9trn to accommodate the debt deficit.     

The treasury notes that the current numerical ceiling lacks a debt suitability plan since it just focuses on consumption without modalities for raising more revenue.     

“If you look at debt to GDP it actually focuses on productivity. If you move your GDP, then you also increase your capacity to carry debt,” explains Bombe Livingstone, Deputy Director, Debt Policy and Strategy management at the treasury.

Why not peg the limit to revenue collection levels?

Pegging the debt limit to the country’s revenue as suggested by some lawmakers from both political camps would create very minimal room for borrowing on the back of big budget deficits.     

Revenue collection is currently KSh2.03trn, with the government pressing the tax authority to shore up collection to KSh3.03trn in the next fiscal year. 

Unlike GDP, which can fluctuate based on the measuring metrics, the revenue figures can hardly face any drastic change. This makes it easy to use revenue levels to peg the debt anchor and monitor its levels.       

However, taking this route will have a huge knock-on impact on Kenya’s ability to continue servicing maturing debt while also meeting other pressing financial needs. For every KSh100 revenue collected, Ksh70 goes into debt repayment.     

“Definitely in terms of debt sustainability, debt to revenue metrics are being monitored. I think most fiscal roles are based on how the [debt] stock grows rather than on the flow [of revenue],” says Ogutu.