Law change: Treasury courting Greece-like debt crisis

The late Irish playwright and critic George Bernard Shaw probably had the Kenyan Government in mind when he famously said: “The government who robs Peter to pay Paul can always depend on the support of Paul.”

Concerns over the country’s piling debt stock in recent years and months are well documented, with every Kenyan currently owing local and international creditors Sh95,200.

But this has not stopped the Government from amassing more debt, including taking up other loans to pay off other creditors, hence the relevance of Shaw’s analogy of robbing Peter to pay Paul makes sense in the Kenyan context.

As if things are not bad enough, the National Treasury is seeking to exploit a new avenue to secure some wiggle room, allowing the country to borrow more to offset maturing debt and meet its financial obligations.

Treasury, in a move spearheaded by Principal Secretary Kamau Thugge seek to amend the Public Finance Management (PFM) Act to open the door for more borrowing in what could see the amount every Kenyan owes both local and international creditors surge to Sh144,144. As a way of keeping public debt in check, drafters of the PFM Act empowered Parliament an oversight role which included ensuring that public borrowings do not exceed half of the country’s GDP.

“The national public debt shall not exceed 50 per cent of Gross Domestic Product (GDP) in net present value terms,” indicated the legal notice 34 section 26, 1 (c). But with Treasury boxed in what it can borrow has come to the realisation that if it keeps on borrowing with the law as currently constituted, it would eventually be in contravention to the country’s regulations.

The current debt to GDP net present value stands at 49 per cent, leaving the Government with a room of one per cent, which ties their hand in future borrowing plans.

It has now gone to Parliament seeking an amendment to the said statute to replace the clause ‘public debt’ with ‘external guaranteed debt’. This measure will technically remove domestic debt from the equation.

This would in effect reduce the country’s debt to GDP ratio from 49 per cent to 25 per cent, opening the door to more borrowing.

“We are asking for an amendment of the PFM Act to classify only external public guarantee debt to be considered as the ceiling for the purposes of the World Bank Country Policy and Institutional Assessment,” argued Thugge when he presented the case for amendment to the Parliamentary Committee on Delegated Legislation at a recent sitting.

Ironically, in what appears to give the strongest indication that Treasury might have its way on the matter, the committee called for a retreat together with the budget committee to ‘understand the intention of the change’. This raises fears that they are likely to get one sided view on this serious matter that could see the country plunge in a debt trap unless there are checks and balances.

But how did we get here?

Kenya has in recent years borrowed heavily to finance infrastructure projects as a way of stimulating the economy and meet its debt servicing obligations.

A case in point is the Government’s move to float another $2 billion (Sh200 billion) whose proceeds that came in earlier this year were largely diverted to financing recurrent expenditure and servicing debt, with not much going to the intended purpose of financing infrastructure projects.

The country is also grappling with how to raise money for the repayment of the Standard Gauge Railway loans that are due from 2023.

To make the matter worse, exports, which could earn the country precious revenue have only grown year-on-year by 1.3 per cent since 2013. This is according to the Economic Survey, while manufacturing only grew by 0.4 per cent last year, down from 10.6 per cent in 2013.

The Kenyan economy is also agriculture-based, but the sector decelerated from a growth of 20.9 per cent in 2013 to 7.2 per cent last year, meaning the business has not grown as fast as the Government had hoped.

Meanwhile, 9.9 per cent of foreign exchange from coffee exports, horticultural goods and services went to the payment of debts as opposed to 4.8 per cent in 2013.

“The problem is that we have run out of road. We have made numerous promises but missed,” said Rich Management Chief Executive Aly-Khan Satchu.

“The biggest risk to our debt is that our investments have a sub-optimal return on investments.”

Money generated from taxing products also slowed down from a growth of 18.8 per cent in 2013 to 12 per cent last year, meaning that the Government essentially needed more loans to pay off older debts.

“This issue of borrowing to retire your debt is how countries operate. You have maturities that fall due over and over. That is how you do liability management,” explained PS Thugge recently when questioned over the move to frequently change the debt ceiling.

However, the rate at which debt is being juggled is worrying, considering the impact this has had on the country’s total stock of debt.

Nine months into power, the Jubilee administration had crossed the Sh2 trillion mark, from the Sh1.7 trillion it inherited from former President Mwai Kibaki’s 10-year regime which ended in March 2013.

Now with the current stock of debt at Sh4.56 trillion, the country’s business, or the GDP as economists call it, has almost half of its balance sheet holdings as debt which poses a major problem for the economy.

This is likely to be further compounded by Treasury’s latest move to amend the PFM Act, effectively opening the floodgates for more borrowing.

It draws a parallel with the Greece option which put the country’s economy in the doldrums, leading to unprecedented austerity measures.

Borrowing spree

This has crippled the Greece’s economy, taken away its sovereignty and literally enslaved it to banks.

Greece also wanted its debt to GDP to look good so that it could access credit at cheaper rates afforded to the Eurozone.

The country’s undoing was buying a currency swap from Goldman and Sachs, an accounting move that meant that it took a loan which it was not required to post in its balance sheet, bringing down its debt to GDP by half.

Soon after, Greece went on a borrowing spree.

But the National Treasury believes that Kenya under International Monetary Fund recommendations can securely borrow up to 74 per cent of its GDP, yet the law says it can only do 50 per cent. So the solution would be to massage its debt portfolio and it will be compliant.

Mr Satchu warns that 74 per cent debt to GDP ratio is untenable as it plays fast and loose with the shilling, bond yields and ultimately puts the economy at risk.

“There is much academic argument around this. However, when we keep pushing close to the limit of market tolerance, you leave no room for political sentiment to change. When it does, you leave no room to recover. If countries like Britain and Japan worry about the level of debt in their markets, it is brave that here we treat this as a numbers game,” said Deepak Dave of Riverside Capital.

Dr Thugge, however, said Kenyans should not be worried that the Government wants to borrow more since there are plans to reduce the shortfall between revenues and expenditure by a third.

“Last year, the fiscal deficit stood at nine per cent and this year we project it will come down to 7.2 per cent and lowered to 5.7 per cent in 2018-19,” he told the Parliamentary Committee on Delegated Legislation.

“We intend to eventually bring it down to three per cent and that I think is where we will be comfortable.”

Analysts warn that keeping with Treasury’s targets may not be achievable, especially since most of the fiscal consolidation is pegged on Kenya Revenue Authority’s ability to raise more income, yet it more often than not, the autority’s collections have fallen below target.

Big Four agenda

Just like Greece, which was notorious for tax evasion and inefficient tax administration, in Kenya, only four million people pay taxes in a country with 18 million registered voters.

If KRA cannot meet its targets, then reducing the deficit may remain a pipe dream and borrowing will, therefore, be inevitable.

Analysts also point out that the State will be hard-pressed to cut the budget since it is not a popular option for a government that has a soft spot for mega projects under the Big Four agenda.

“Government could face massive political backlash if that level of deficit was to be targeted. Tax collection is stretched already and cuts would need to be drastic to come even close,” said Mr Dave.

While Treasury plans to go back to the market for Sh300 billion foreign loans in the next financial year, analysts say even with a good looking debt to GDP figure, investors will not be impressed.

“Even with the reduction, investors will still prefer to look at the total stock of debt because foreign investors will want to see the debt as a percentage to GDP to see how well or badly you are doing,” explained Stanbic Bank Regional Economist, East Africa Jibran Qureishi.

Mr Dave also concurred that Treasury’s move does not in any way mask reality on the ground. Investors, he says, will always make an informed decision.

Mr Satchu, on the other hand, warned that given the current market dynamics, the country may get punished when it returns to the international markets with costly loans.

Too much risk

“We can change the legislation but ultimately, the arbiter is not our legislative criteria but the markets,” he said.

Treasury argues that given that local commercial debt is in shillings, it does not pose too much risk and that is why it should be excluded in the framework. Mr Qureishi, however, warns that this can change so quickly and become risky given the experience of Ghana.

“We can understand the distinction of foreign and local debt because you can address local debt by either printing more money or raise taxes but that cannot be done on dollars because we cannot print dollars,” the Stanbic regional economist said.

Dave, the founder of Canadian based Riverside Capital, an Africa-focused advisory firm on financing, debt and capital raising, said changing the currency in which your bank statement is printed does not make a debit turn magically into a credit balance.

“The loan will still be on the country’s books,” he said.

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