Tax hike fears as State runs out of wiggle room for more borrowing

National Treasury PS Dr Chris Kiptoo. Treasury is counting on fresh financing from IMF and the World Bank in the coming weeks. [Elvis Ogina, Standard]

The government may have to hike taxes, cut spending or seek costly external commercial loans amid the ongoing economic crisis.

The country is, however, counting on financing from the International Monetary Fund (IMF) and the World Bank, which are expected to give $1.25 billion (Sh162 billion) budgetary support in the coming weeks.

The Central Bank of Kenya (CBK) has also said it is engaging IMF and hopes to secure a new loan under the Fund’s Resilience and Sustainability Trust (RST) to help countries ensure sustainable growth. 

This is on the back of narrowing borrowing options that have locked the National Treasury out of both domestic and global capital markets, laying the ground for a looming debt crisis. The government is already on the brink of missing its revenue collection target for the current financial year that ends in June, State data shows. 

With no more wiggle room with revenue and debt taps running dry, and the debt labyrinth getting murkier, the cash-strapped government is finding itself at a crossroads. 

This could deal a major blow to President William Ruto’s revenue collection plan to fund his costly campaign promises and bring down the cost of living. 

The potential looming financial crisis could also threaten Kenya’s ability to repay huge maturing debt obligations and also dent its ability to fund national programmes like health and education. 

This was demonstrated last week after the CBK was forced to cancel the issuance of a reopened 15-year bond, whose sale closed on Tuesday, underlining the fresh challenge to raise funds from the domestic market. 

The CBK did not provide additional details on the cancelled 15-year tranche. 

But the shock cancellation came hot on the heels of a sustained low uptake of the bonds, pointing to narrowing domestic borrowing options for the Treasury with the looming end of the financial year this June. 

The State had targeted to raise at least Sh550.9 billion in its domestic borrowing programme for the current fiscal year.  

But investors in the hunt for higher bargains are frustrating this plan on the projection of higher interest rates amid government appetite for debt and persistently high inflation. 

CBK Governor Dr Patrick Njoroge. [Elvis Ogina, Standard]

Amid the building-up crisis, the Treasury on Thursday doubled down on a plan to raise the debt ceiling in order to allow for more borrowing to avert a crisis.  The Treasury defended the controversial plan to expand the borrowing limits, insisting ensuring access to more debt will avert an economic crisis. 

The Ruto government, which came into office in September last year, has laid out plans for Parliament to replace the current public debt limit with a debt anchor hinged on the gross domestic product (GDP).

“By setting a debt anchor, we are committing ourselves to a sustainable level of debt that is in line with international best practice,” said Treasury Principal Secretary Chris Kiptoo in a statement. “This will help us to manage our debt more effectively and reduce the risk of default.” 

The government wants to replace the Sh10 trillion public debt ceiling with a debt anchor set at 55 per cent of the GDP in the present value terms. 

Dr Kiptoo said a higher debt ceiling will also provide more certainty for investors and improve the country’s creditworthiness. 

“Further, the debt anchor conforms with guidelines set by the International Monetary Fund (IMF) Debt Limit Policy, which is linked to debt sustainability,” he said. 

“Another advantage of a debt anchor is that it provides a clear and consistent framework for managing our debt, and it allows the government to plan for the long term with confidence. It also gives us greater flexibility to respond to economic challenges.” 

The government expects to get more than $1.25 billion (Sh162.5 billion) in financing from both the World Bank and IMF by next month.

The injection of the funds is expected to enable the economy to withstand the shocks and also help the government meet some of its obligations, with CBK Governor Patrick Njoroge ruling out the likelihood of defaulting on debt repayments that are falling due.

In an interview with Reuters last week, Dr Njoroge also said the government is in talks for new funding from IMF to support falling foreign exchange reserves.

“We are not very worried because we have significant inflows coming in,” Njoroge said on the sidelines of the IMF and World Bank Spring Meetings in Washington.

Therefore, even while experiencing difficulties accessing debt markets, the governor noted that Kenya expects $250 million from syndicated loans this month and a $1 billion (Sh134 billion) budgetary support loan from the World Bank in May.

iTax System Support Centre. KRA says it has kept its pace with revenue collection compared to previous years. [Jonah Onyango, Standard]

“This compensates for the $1.2 billion (Sh160.8 billion) we couldn’t get from the market last year.”

Njoroge said Kenya is also seeking a new loan under the Fund’s Resilience and Sustainability Trust (RST) to help countries ensure sustainable growth. “We have already started the work,” he said, without disclosing the loan’s potential size.

Treasury revealed recently it is considering tapping into the international capital markets with a fourth Eurobond issue in less than eight years to help pay off part of its debt obligations. 

Kenya is, however, likely to set itself up for costlier debt if it implements the Eurobond plan in the near term, said analysts. 

This is against a backdrop of weaker credit rating by global rating agencies, signalling taxpayers will have to dig deeper into their pockets to service the planned loan amid tighter global loan market conditions. 

Three major US-based credit agencies - Fitch Ratings, Moody’s Investors Service and Standard & Poor’s - have in the recent past slashed Kenya’s credit ratings outlook, dimming the country’s chances of tapping cheap credit from the international financial market. 

This means investors willing to buy the Kenyan bond in the international market will demand a risk premium to cushion against risk of default.

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