February 21st 2018

Business / Economy

Public debt set to surpass Sh3 trillion mark

Michael Wambugu PKF Partner says Kenya’s public debt-to-GDP ratio is 41 per cent – which is by any standards still manageable.

By Jack Otwalanewsdesk@kenyafreepress.comTuesday, 07 Jun 2016 08:45 EAT

The public debt is expected to reach Sh3.2 trillion ($31.6 billion) at the start of 2016/17 financial year, according to budget estimates.

The 2016/17 budget summary shows that government spending on debt serving will hit Sh470.81 billion ($4.66 billion).

Finance cabinet secretary Henry Rotich says Kenya’s borrowing still falls within the guidelines set in the management of public debt.

The debt sustainability analysis indicates that Kenya’s debt ratio still remains within sustainable bounds adding that the safety margins to the indicative thresholds are lower than what was had previously been recorded.

The minister says Kenya’s Medium Term Debt Management Strategy 2016 forms the basis of Government borrowing - where before a loan is taken, it’s evaluated in terms of the costs and risks.

“The policy framework provides guidance to the National Government on the amount and type of borrowing to undertake over the medium term,” he says.

The CS argues that the Government is trying to minimize the risk exposure associated with the external debt portfolio by borrowing more through concessional debt.

Rotich emphasizes that financing on non-concessional window are only limited to projects with high-expected risk-adjusted rates of return including critical infrastructure that would otherwise not be undertaken due to lack of concessional financing.

The World Bank`s Country Policy and Institutional Assessment (CPIA) assessment have awarded Kenya a score of 3.8 and thus is subject to the threshold ratio of 74 percent on the Present Value of Debt to GDP.

Michael Wambugu PKF Partner says Kenya’s public debt-to-GDP ratio is 41 per cent – which is by any standard still manageable.

Wambugu says the current value (PV) of public debt-to-GDP is expected to be 43.7 per cent during financial year 2015/16 before declining to 41.3 per cent by financial year 2017/18.

“The debt service-to-revenue ratio remains below the 30 per cent threshold. Over the medium term, the results from the DSA indicate that Kenya’s public debt remain sustainable,” Wambugu says.

However, while borrowing is viewed as a noble task for countries developing their infrastructures, analysts admit that there is need to strike a balance between domestic and external borrowings.

Analysts and economists have cautioned that over borrowing could plunge the country into a severe debt crisis in the absence of alternative measures.

Cytonn Investments Manager Maurice Oduor says that there are risks associated with the changing funding patterns that could see the country’s debt levels rise, if government’s unrelenting borrowing spree is not controlled.

Oduor argues external borrowing is good but only if it’s done at the concessional rate. “The Government needs to handle with care international markets borrowings as overreliance on global markets could open up the country to global economic crisis,” Oduor says.

However, according to International Monetary Fund (IMF), the sustainable debt level for the emerging market is 50 per cent to GDP. Kenya currently stands at 52.0 per cent, indicating that we have surpassed the average target. The high exposure could force the country to pay a premium if it is to borrow from foreign markets.

“It’s important to note that Kenya’s current debt levels have risen much faster and crossed the sustainable target within the fiscal year 2015/2016, from 41.8 per cent in 2014/2015,” Oduor says.

Apurva Sanghi, Lead Economist for Kenya, Uganda, Rwanda and Eritrea, World Bank Group says Kenya’s appetite for Chinese loans which come with attractive interest rates and without strings attached for good governance in the long run could harm Kenya due to their lack of transparency.

Johnson Nderi, head of Corporate Finance and Advisory manager, ABC Capital, says the mere fact that the World Bank and IMF say that Kenya’s debt is still manageable need not  be the measuring yardstick.

“Can you imagine a country spending 20 of its budget expenditure on debt repayment,” Nderi asked. He says there are many measuring yardsticks to know whether a country is going beyond what it borrows.

Nderi has expressed concern that the payment of interest alone on existing debt exceeds the repayment of principal by 16.2 per cent. He says when the interest rate on domestic borrowing is high uptake of loans may not last for long.

He said there are many ways through which borrowing can be measured. There is debt-to-GDP ratio, foreign debt to exports ratio and Government debt to current fiscal revenue ratio.

Nderi said what is always used in Kenya is the debt-to-GDP ratio – which sometime is not accurate and hardly informs people about the true position, which foreign debt to exports ratio and government debt to current fiscal revenue ratio tell accurately.

Jack is a business and society writer at the Kenya Free Press

Stay Connected