'Government is broke', Ndii hints, amid pay delays for civil servants

Cabinet Secretary National Treasury Njuguna Ndung'u when he appeared before the Senate standing committee on Finance on April 5, 2023. [Elvis Ogina, Standard]

State House's top economic adviser David Ndii yesterday hinted that the government is facing an acute cash crunch amid unprecedented salary delays for civil servants at both the national and county levels.

To demonstrate magnitude of the crisis, Dr Ndii revealed that President William Ruto's administration avoided a default on its sovereign debt obligations without divulging additional details on the economic risk.

A default is a failure by a country's government to pay its debt and has grave financial implications for the economy.

Dr Ndii tweeted as salary delays for civil servants threatened to fuel political and union tensions in the country.

The government has delayed paying March salaries for most of its public sector workers in a sign of a major financial crisis. The civil servants and unions are now threatening to down their tools from next week.

But Ndii said the cash-strapped government has now been forced to prioritise other crucial state expenditures like honouring debt obligations over salaries.

"Is public finance that difficult?" Ndii posted on his verified Twitter account. "It's reported every other day debt service is consuming 60 per cent of revenue. Liquidity crunches come with the territory."

Ndii continued: "When maturities bunch up, or revenue falls short, or markets shift, something has to give. Salaries or default? Take your pick."

Kenya's stock of public debt stood at Sh9.182 trillion as of January 23 this year, according to the Central Bank of Kenya (CBK) provisional data having jumped by Sh481 billion from September last year.

Dr Ndii's comments yesterday fuelled speculation on the State of the country's finances and economy.

The Sunday Standard could not immediately get a comment from the National Treasury or State House on how serious the situation is or when a way out is expected. Ndii also did not respond to The Sunday Standard's requests for additional comment on the matter, which will be keenly watched by Kenya's global creditors.

The national government has not disbursed Sh92 billion to county governments being their equitable share of nationally generated revenue since the beginning of the year, which threatens to ground their operations.

Treasury Principal Secretary Chris Kiptoo recently blamed a shortfall in revenue collection amounting to Sh67 billion for the cash crunch.

Appearing before the Senate Public Investments Committee, Kiptoo, however, said the delay also affects national government ministries, departments and agencies, which are awaiting disbursement of recurrent expenditures of Sh96.5 billion, development funds of Sh55 billion and pensions totaling Sh53 billion.

President Ruto's administration faces the uphill task of stabilising government finances and controlling living costs. It is facing the financial headache of bringing down the cost of living and creating jobs for the low-income segments of society against a backdrop of a slowing economy and lesser finances even after instructing Kenya Revenue Authority to ensure it collects an extra Sh600 billion by the end of this financial year.

In February, National Treasury Cabinet Secretary Njuguna Ndung'u pointed to the poor state of the country's finances citing a lack of resources to finance key public expenditures.

Prof Ndung'u, while then equating the national budget to a household budget, said at the time the available resources were less than the listed expenses, asking Kenyans to be patient.

The announcement dampened hopes of reduced cost of living for millions of Kenyans in distress.

"Ukiwa unaishi kwa hii nchi unajua ile matatizo ya hela iko hii nchi, it is something we have to resolve, we have a resource constraint...hatuna hela, lazima tujisaidie. Lakini tukipata hela, yote yatawezekana...tumetoka mbali, huo upungufu utakwisha, hatuwezi sema utaisha leo au kesho, lakini tutakuja kutatua hiyo shida...," said the Treasury CS during an induction forum for the Senate Standing Committee on Finance and Budget.

To stabilise public finances, the government has kick-started a process to cut non-priority expenditures and says will only consider borrowing from global lenders instead of expensive commercial loans like the Eurobond.

The National Treasury has also said it will introduce several tax policies over the next year. This is aimed at raising the needed resources to offset the budget deficit created by the huge public debt.

But this will be a delicate balancing act, experts have said at a time the economy has slowed amid global and domestic factors straining revenue collection by KRA and limiting the borrowing window for Kenya from the global markets. The government has also in the recent past come under the spotlight over lavish spending amid its public commitments to austerity.

"So, is he (Dr Ndii) saying the government is only now realising this? If so, what choice are they leaning towards? As the senior national economic tsar, we need clarity from him, not cryptic wordplay," said Deepak Dave of Riverside Advisory.

Mr Ndii is among a group of economists and experienced technocrats recently appointed by Ruto to help steer the battered economy and implement the bottom-up economic model touted by the ruling Kenya Kwanza as the panacea for the country's economic woes.

Sovereign default is the failure of a national government to repay its debt. Governments are typically hesitant to default since doing so is likely to bar the country from accessing debt markets again for years and make borrowing more expensive, at least for a time, when it becomes possible.

A default could create a host of headaches for Kenya.

It would for instance ruin Kenya's financial reputation in financial markets and would be tarnished. That would depress Kenya's credit ratings and increase the borrowing rates the government and companies paid.

Defaults in other countries such as Argentina have seen aggressive creditors go after physical assets such as a navy vessel and the country's presidential aircraft.

Countries borrowing in their own currency can always print more of it as an alternative to a sovereign default, and may also be able to avoid it by raising more tax revenue.

Wars and revolutions, mismanagement, and political corruption are among the leading causes of sovereign default, according to economists.

Private investors in the sovereign debt of foreign countries closely study the economy, public finances, and politics of a country issuing bonds to assess and price its default risk.

Sovereign default may slow economic growth and is likely to bar further government borrowing from overseas investors for years.

Distressed sovereign borrowers often seek to negotiate a debt restructuring forcing their creditors to write off part of the debt in exchange for reduced debt service payments.

President Ruto's administration is targeting borrowing Sh3.6 trillion in his first five-year term. The government recently laid out plans for Parliament to replace the current public debt limit of Sh10 trillion with a debt anchor hinged on the Gross Domestic Product (GDP). This comes at a time when the Treasury is trying to balance its debt portfolio, which is fast approaching the allowed Sh10 trillion limit after expensive commercial debts piled up, taking up more than 60 per cent of tax revenues.

The Commission for Revenue Allocation (CRA) had recently warned the country is set to breach its Sh10 trillion debt ceiling - with Kenya's financial stability at stake.

President Ruto tasked the National Treasury to begin planning spending cuts on non-priority items to save Sh300 billion this year though non-essential spending on such goods and services continues unabated.