Cap borrowing by State to boost private sector credit and capital

On the rate cap, the proposal by Gatundu South MP Moses Kuria to allow higher interest depending on a customer’s risk holds only if the National Treasury controls its appetite to borrow domestically, even at a higher rate.

The legislator said he has already written to National Assembly Speaker Justin Muturi about the intended Bill.

A higher cost of domestic capital in the current circumstances is not a deterrent to Treasury continuing to borrow and crowding out the private sector from the domestic financial market.

The Public Finance Management Act (PFMA), 2012 provides for Parliament to set limits for borrowing by the National Treasury. Further provisions in section 62 (3) of the Act establish a directorate under the Treasury known as the Public Debt Management Office (PDMO) whose role comes into sharp focus and the overarching position of the Cabinet Secretary for Finance.

The PDMO is required by law to ensure Government borrowing is at minimum cost. It is further required to ensure the benefit and cost of the debt is proportionately shared between present and future generations; the hold harmless principle can be viewed in this context.

Quality of life

Is the present generation being left better than it was before or worse off? What of the future generations, will they enjoy a better quality of life by the outcomes of today’s economic governance activities?

The National Treasury must be careful not to ground the private sector for short-term gain as its recovery to sustain and support future growth in the economy will be an uphill task.

Borrowing from the domestic market does minimise foreign exchange risks occasioned by volatility in the international capital markets. Domestic capital is, therefore, at a lower cost to the Government when looked at from one angle without taking into account the impact on the overall economy when this borrowing is excessive and stifles private sector access to credit.

The debt management policy seeks to minimise exposure and ensure sustainability of public debt by avoiding unintended consequences.

Through the publication of the medium term debt management strategy report, for 2018-19 and 2020-21 financial years in February 2018, one can quickly see the trajectory of growing appetite by the National Treasury to borrow in the domestic market and consequently crowd out the private sector.

Evidently, from the strategy report, the Treasury has failed to keep within the limits set for its short-term borrowing in the domestic market.

We must therefore ask ourselves, is the Treasury able to adhere to the debt ceilings specifically in the domestic market as guided by the PDMO, or is further legislation the best approach?

The upshot of revising the rate cap without having a control mechanism for Government’s unabated appetite to continue borrowing in the domestic financial market, would only result in further unintended consequence of banks making higher returns at the expense of domestic borrowers, ideally at a higher cost to the taxpayer. This will seriously compound the current problems.

Logical approach

It is worth to note that the domestic debt market is dominated by commercial banks who continue to hold approximately upwards of 54 per cent of the total outstanding portfolio.

A more logical approach would be to establish by legislation a cap (ceiling) for Government borrowing in the domestic market which will automatically release the much-needed (resultant idle) capital to the private sector.

Since banks are by nature purely capitalist, they will be forced to deploy the idle capital to the private sector, leading to a more sustainable win-win scenario for the Kenyan economy as a whole.

Further, growth in private sector activity resulting from the additional availability to capital will grow Government revenue through taxation, reducing the need for budgetary deficit being financed by debt and indeed create real jobs in the economy.

Reviewing the rate cap at this point in time with the current Government borrowing appetite does not guarantee or provide an automatic trigger for banks to lend to the private sector.

A ceiling on Government borrowing in the domestic market is a sure silver bullet to cure the current situation of excessive State borrowing in the domestic market, lack of credit to private sector, slowdown in real economic growth and lack of jobs for the youth.

- The writer is the Operations Director at Legend Hotels. [email protected]

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