Experts have faulted Treasury’s proposed budget financing strategy in the next financial year, saying it could derail government projects.
National Treasury Cabinet Secretary Njuguna Ndung’u has maintained the new administration will opt for direct concessional budget funding from multilateral lenders instead of expensive domestic and foreign commercial debt.
Prof Ndung’u said last week that reliance on institutions like the International Monetary Fund (IMF) and the World Bank in the medium term to bridge the budget deficit would help reduce debt and the country’s vulnerabilities.
Treasury is trying to balance its debt portfolio after expensive commercial debts piled up and became expensive to repay, taking up more than 60 per cent of tax revenues.
“It’s very important that you realign your liability management with resources that you have and the servicing of that with debt,” said Prof Ndung’u at a press briefing in Nairobi last Thursday.
“You can call it a substitution effect. You’re substituting the short-term debt with some concessional long-term debt - the short-term debt being domestic.” According to Prof Ndung’u, while the domestic and external debts are in the ratio of 50:50, the cost of servicing the domestic debt is high, leading to fresh sustainability concerns.
“But there is also another dimension of domestic debt. We want to make sure that the domestic market has liquidity, so in a sense, if your liability management is actually to balance out or to lean more into concessional financing, then you are releasing a lot of liquidity into the market which will be available for investment,” he said.
But budget experts say while multilateral loans are cheaper, long-term and have a grace period when Kenya will not be required to pay as the State clears the bad expensive loans, they take time to negotiate and seal, jeopardising urgent State programmes.
“The financing plan proposes to halt commercial borrowing, reduce domestic borrowing and capitalise on concessional financing,” said the Parliamentary Budget Office (PBO) in a new report.
The unit advises MPs on financial and economic matters. “Given the cost implication for the (new administration’s) agenda... overreliance on concessional financing may not be achievable in the short run due to the volatility of concessional financing and the time required to negotiate for the same.”
Prof Ndung’u revealed last week that Kenya has returned to the World Bank for another undisclosed multi-billion-shilling loan to help fund the new administration’s programmes and stabilise its finances as the economy slows.
He made the announcement days after Kenya bagged $433 million (Sh52.66) billion from the International Monetary Fund (IMF) for budgetary support and to help fight drought.
The World Bank in March this year approved a $750 million (Sh90.7 billion) Development Policy Operation (DPO) that would help strengthen fiscal sustainability through reforms that contribute to greater transparency and the fight against corruption.
The DPO was the second in a two-part series of development operations initiated in 2020. It provides low-cost budget financing along with support to key policy and institutional reforms.
DPOs are used by the World Bank to support a client country’s ambitious policy and institutional reform agenda to help to accelerate inclusive growth and poverty reduction. The Bank says it approves about 40-50 DPOs globally each year.
Kenya has been forced to seek help from the World Bank and the IMF amid a deteriorating cash flow situation marked by falling revenues and worsening debt service obligations.
The country is set to draw down another loan of Sh7.62 billion loan from the African Development Bank (AfDB) to support fertiliser and seeds acquisition for 650,000 local farmers to boost food production and control consumer price inflation, outgoing Treasury Principal Secretary Julius Muia said.
The loan inked in July this year before the new administration took office is part of the AfDB’s $1.5 billion (Sh181.5 billion) African Emergency Food Production Facility, an Africa-wide initiative to avert a looming food crisis exacerbated by the war in Ukraine.