Early in the week, civil society, led by Okoa Uchumi and AFRODAD got together with the parliamentary committee on public debt to host the Kenya conference on debt and development at Safari Park, Nairobi.
Attending as a panelist, I spoke on options for debt recovery. The conference kicked off with robust debate. One group, to which I belong, argued that the debt problem is actually an expenditure problem.
That the need to borrow arises because we insist on spending much more than we can raise in taxes. The other camp believes that what we have is an “odious” debt problem.
Their contention is that the debt has not been legally contracted, as it is not contained in an annual appropriation act.
Here are some of the arguments. The annual budget books present consolidated fund services as an appendix, although they are the first charge on the consolidated fund. Vote head 2420000 is for interest on domestic debt.
In the current financial year, interest on domestic debt is estimated at 628.3 billion shillings.
Vote head 5210000 is for domestic debt redemptions, budgeted at 374.54 billion shillings for the current financial year.
Total interest payments for this financial year amount to 775 billion, while total redemptions are 850 billion shillings.
The total debt service of 1.63 trillion shillings is 19.5 per cent more than last year, and 41.2 per cent higher than the year before (2021/22). This rapid increase in the debt service amount is the source of worry for analysts and market players alike.
To appropriate is to ‘devote (money or assets) to a specific purpose’. The national and county assemblies consider and vote on the budget estimates. Which means they can change them.
When structuring financing for counties, a regular question I encounter is, what happens if the assemblies do not allocate monies to meet an obligation? The constitution at 207 (2) (a), and 221 (7) gives comfort to creditors, independents commissions and offices, by removing that risk.
Once an item is created as a charge on the consolidated fund by either the constitution or an act, it is already devoted for that specific purpose, so parliament does not have to redo it.
This means the annual cashflow needs of government are the sum of what is contained the appropriation, and the consolidated fund services amounts in the appendixes.
And given that we don’t agree on the extent of the problem, nor its nature and causes, finding a cure we can all agree on was going to be even more difficult. But here are a few things that are not in dispute.
Throughout this year, investors have shown preference for the short-end of the government securities market.
Treasury has only managed to attract uptake of long-term securities by offering very high interest rates. Such was the case with the 213.4 billion shillings, tax exempt infrastructure bond, whose effective interest rate was 22.65 per cent issued on June 19.
In last week’s auction for securities dated August 21, only the 91-day bill was oversubscribed. The 955.7 per cent performance indicating that the market prefers the short-term securities.
The 182-day and 364-day bills attracted very low subscription rates at 39 and 26 per cent respectively.
Further, the market demanded very high interest rates for longer maturities – 17.55 per cent for the 2 year and 18.16 per cent for the 5-year bond, both which were on tap.
The subscription rates for the two re-opened bonds were 96 and 37 per cent respectively.
Three forces are driving this market sentiment. First, the Central Bank’s stated intention to keep interest rates high until inflation is contained.
Second, the Treasury’s aggressive domestic borrowing program, requiring 46 billion shillings monthly in new debt.
Government has already been borrowing aggressively, having raised 101b since July 1. And third, skepticism on the ability of a sluggish economy to generate the 2.9 trillion targeted tax revenue this year. Failure to meet revenue targets will mean higher borrowing.
Treasury has responded by announcing a change of strategy, shifting 270 billion shilling intended to be borrowed in the domestic, to external borrowing.
The market has remained skeptical, however, because interest rates are high internationally and the country’s credit rating was downgraded last December.
The recent spat between Moody’s and the government regarding whether a planned euro bond buy-back implies a default event has not helped matters either. So, government will pay a hefty premium, even in the international markets.
As a result of these trends, businesses and consumers are likely to face very high financing costs well into 2025. What then are the options for debt recovery?
The ultimate cure is the balanced budget approach. Governments should use deficits to stimulate the economy during recessions, and run surpluses during boom time.
We have had 17 straight years of budget deficits. The deficit has now taken on a structural nature. Aggressive borrowing was used to drive the infrastructure-led growth.
It is now time to let the private sector do the job! A second strategy is to reprofile debt maturities. That is, trade shorter for longer term, cheaper debt. This is standard practice. Except it only works when you have lower interest rates.
The third approach, quite related to the first, is to reduce
government expenditure. Going by many fancy names including fiscal consolidation and austerity, there is plenty of scope to get it done.
It has been promised in formal government documents like the budget policy statement and the budget speech. It has been promised on the political podium. But no concrete action has been taken.
Duplication of devolved functions by national government departments is a great place to start.
After paying salaries and interest, other recurrent expenditure still amounts to about 1 trillion shillings!
Source: Nation Africa