ICPAK pushes for creation of sinking fund to pay debt

Monday, February 26th, 2024 09:00 | By
ICPAK pushes for creation of sinking fund to pay debt
ICPAK pushes for creation of sinking fund to pay debt. PHOTO/Print

The Institute of Certified Public Accountants of Kenya (ICPAK) has renewed calls for the establishment of a sinking fund to manage Kenya’s public debt portfolio which has surpassed Sh11 trillion.

A sinking fund is a financial strategy that allows a country to accumulate funds over time, ensuring financial readiness upon the maturity of its debts. This proactive approach aims to enhance Kenya’s fiscal sustainability by ensuring that the country maintains a sustainable level of public debt. “Establishing a sinking fund will enable the country to set aside funds in the years leading to debt maturity,” ICPAK stated in its submission on the draft budget policy statement 2024.

The creation of such a fund would aid in alleviating future liquidity issues resulting from substantial debt repayments after the grace period ends. It would also lessen the burden on the Consolidated Fund Services (CFS), which currently handles other mandatory payments such as salaries and pensions, along with public debt.

In March last year, MPs supported Controller of Budget (CoB) Margaret Nyakang’o’s proposal to establish a special fund for debt servicing to prevent debt distress.  The Parliamentary Committee on Public Debt and Privatisation set a July 2023 deadline for the National Treasury to present regulations that would guide the formation of the sinking fund, aiming to alleviate the burden on the Exchequer.

Kenya is currently struggling with significant expenses to repay Chinese loans, which is putting a strain on ordinary revenue collections. This situation led Nyakang’o to advocate for the fund.

Nyakang’o cautioned that Kenya is at risk of falling into debt distress due to the pressure on the Exchequer to repay matured loans. These efforts aim to manage Kenya’s debt situation effectively and mitigate the impact of debt service repayments on development and service delivery by the government to Kenyans.

Managing surplus reserves

In addition to the sinking fund, ICPAK has also proposed the establishment and operationalisation of a Kenyan Sovereign Wealth Fund (SWF) through policy and legislation. The fund provides a structured approach to managing surplus reserves from various sources, such as trade surpluses or revenues from state-owned enterprises.  This would help ensure financial readiness for future needs and contribute to the country’s long-term fiscal sustainability. ICPAK has also emphasised the need to prioritise projects independently assessed for financial viability and consider absorptive capacity constraints within the investment timelines.

Other suggested measures include the consideration by the Government for Public-Private Partnerships (PPP) as a form of financing development expenditure, gradually retiring expensive commercial loans for long-term concessional loans. It would also involve publishing core public and publicly guaranteed debt statistics at the general government level annually, including information on individual debt instruments contracted.

“The growth of Kenya’s public debt in the last ten years has raised concern on the sustainability of the government’s fiscal path given the increasing impact of debt service repayments on service delivery and the economy,” ICPAK noted.

 According to the 2024 Medium-Term Debt Management Strategy, public and publicly guaranteed debt in nominal terms as at the end of June 2023 was Sh10.3 trillion (70.8 per cent of GDP). This comprises an external debt stock of Sh5.4 trillion and a domestic debt stock of Sh4.8 trillion.

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