Country’s spending and debt are dangerously high

In its weekly bulletin, the Central of Kenya (CBK) last Friday released economic figures that in all likeness point to a deficit getting out of control.

According to the bulletin, the Government offered for sale Treasury bills worth Sh7 billion, during the week ending June 7, 2013. A total of Sh6.5 billion was accepted out of Sh20.1 billion bids received.

In the report, gross government domestic debt increased by $2.8 billion since June 2012. This followed increases of $1.52 billion, $725 million, $316 million and $41 million respectively in the stocks of Treasury bills, Treasury bonds, government overdraft at the Central Bank and other domestic debt.

Gross Government domestic debt increased by 25.8 per cent or Sh221.3 billion, to Sh1.1 trillion on May 31, 2013, from Sh858.8 billion at the end of June 2012.

Between April and May 24, Government had borrowed Sh100 billion to fund its operations. And just a fortnight ago, the Treasury borrowed another Sh300 million to fund expanded government operations under devolved system of government.

While it does seem normal Government business on the face of it, the truth is a growing propensity to rely on short-term debt instruments to fund daily operations points to a Government already stewing in the thick of a cash-flow crisis.

Unfortunately, there is little promise that the trend will change anytime soon. In fact, in just under 36 hours, the Jubilee Government will be presenting a Sh1.64 trillion budget.

The biggest ever and specifically designed to implement the devolved system of Government and roll out Jubilee’s ambitious promises, funding the budget will test the character and resilience of the new regime.

Sh1.64 trillion budget

Borrowing as it were, is the easiest option, but also one that will not only hurt the economy but also negate the Government’s own policies.

Particularly, excessive borrowing from the domestic market will set off high interest rates — a reverse of what CBK has been pushing for. This is sure to stifle growth.

Unqualified government participation in the money market has the unwanted effect of crowding out small businesses from the credit market.

And while, the usable official foreign exchange reserves remained above the minimum requirement of four months of import cover, it was somewhat thinner — marginally shrinking from $5,805 million as at May 30, 2013 to stabilise at  $5,800 million as at June 6, 2013.

Perhaps it is at this level that the new leadership should be sounded out. Even as Uhuru seeks growth, he must do so without making worse the country’s debt problem.

As a matter of fact, the current debt levels call for deliberate measures to urgently tame deficits with the aim of stabilising and ultimately reducing debt as a percentage of gross domestic product.

The country’s current spending and debt are dangerously high, and future spending and debt are on track to rise even higher in large part due to devolution — a Government structure huge on appetite but lean on production.