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Treasury seeks Sh125b loan to plug budget hole

By , People Daily Digital
Monday, March 22nd, 2021 00:00 | 4 mins read
The National Treasury building. Photo/PD/Alice Mburu

Anthony Mwangi and Noel Wandera

The country is likely to sink deeper into debt after the National Treasury said it will be borrowing Sh125 billion to fill a hole in the budget for the remaining three months of the current financial year.

The Budget and Appropriation Committee of the National Assembly has raised the red flag warning that the country could descend to unmanageable levels of debt if the Treasury continues its borrowing spree.

The committee, which is chaired by Kieni MP Kanini Kega, notes that given the expected revenue underperforming, the increase in the fiscal deficit will primarily be funded by commercial borrowing.

The Sh125 billion additional deficit will be financed by Sh46 billion net domestic financing and Sh80 billion net foreign financing.

“The bigger share of the additional foreign financing is expected to be raised through the issuance of sovereign bonds.

This is relatively more expensive debt,” the committee notes in its report tabled in Parliament last week.

“Borrowing commercially to finance increasing expenditures may contribute to interest payment on debt crowding out development expenditure in the medium term,” says the committee.

National Treasury Cabinet Secretary Ukur Yatani announced in December that Kenya’s total debt portfolio stood at Sh7.2 trillion as of September 2020 about Sh1.8 trillion shy of the Sh9 trillion debt ceiling imposed by the Public Finance Management Act (PFM) 2012.

Amani National Congress leader Musalia Mudavadi, however, warned against the country’s ballooning debt burden.

“Unless the economy is growing we are entering a phase of mixed taxation for the ordinary people and further reduction of development expenditure. Our spending exceeds our revenues,” said Musalia, a former Finance minister.

“My advice is that we retire expensive debt and go for concessional borrowing instead of commercial.

The benefit of commercial borrowing is because the loan payment period is longer and the interest low,” he told People Daily.

 “We must also start aligning our expenditure and live within our means. We should desist from seeking expensive loans to fund infrastructure projects,” said Mudavadi.

 Financial experts cautioned that borrowing to meet the Sh125 billion deficit was not a good idea saying it could stretch the economy to unmanageable levels.

“This basically means additional debt sprinting towards Sh9 trillion public debt, which is unsustainable given shortfalls in tax revenue,” says Albert Onyango, a Finance lecturer at the United States International University (USIU).

He adds that the sovereign bond will be very expensive due to the country’s huge public debt and rating.

“Piling additional expensive debt is reckless borrowing by the government. Domestic borrowing thus is at the expense of the private sector which is the engine of development,” Onyango explains.

Eurobond financing

 According to Churchill Oguttu, who is the head of research at Genghis Capital Limited, the country has a Supplementary Budget I that is expansionary with a target increase of 80.7 billion, while revenues are expected to go down by around Sh40 billion that has resulted in the financing gap which has to be met externally and also domestically.

“With domestic financing, there is the risk of crowding out private sector hence the emphasis has been towards external financing.

Then again, it takes a while to hammer out financing from bilateral creditors and multilateral creditors, hence it’s a no-brainer that we have squared back to Eurobond financing,” Oguttu says.

Treasury told Parliament recently that the government borrowed Sh2.7 billion every day between May 1 and August 30 last year.

The report stated that the government took Sh322 billion loans with the repayment period for most of the loans set to commence in 2025 and will be paid in Euros.

Treasury further revealed that the loans have been contracted between the Kenyan government, commercial and multilateral creditors.

The proceeds of the loans will be used to finance Covid-19 emergency response projects and, locusts menace, Universal Health Care (UHC), youth projects and infrastructure projects in the housing sector, energy, environment.

The Public Finance Management (PFM) Act mandates the National Treasury to periodically update Parliament on the country’s debt status.

“At the end of every four months, the Cabinet Secretary shall submit to Parliament stating the loan balances brought forward, carried down, drawings and amortizations on new loans obtained from outside Kenya or denominated in foreign currency,” Section 31 (3) of the PFM Act states.

The country’s total debt is evenly spread between external and domestic sources at Sh3.66 trillion (51 per cent) and Sh3.46 trillion (49 per cent) respectively.

According to the report, Sh23.9 billion borrowed from the African Development Bank (ADB) and signed on May 22 this year will go towards supporting the government’s efforts to mitigate the economic and social impacts of Covid-19 pandemic on local businesses and households.

The loan will be repaid in 34 principles of Sh745.6 million (5,529,411 euros) that will be paid semi-annually on February 1 and August 1 beginning August 2027.

The Covid-19 loans come at a time when investigations are ongoing regarding the loss of Sh7.6 billion at the Kenya Medical Supplies Authority (Kemsa).

Another loan signed between the government and France is for Sh4.2 billion, for the supply of medical equipment to public healthcare institutions in the country and which will be repaid on 56 principle payments of Sh79. 5 billion beginning December 2032.

“The purpose of the loan is to supply medical equipment and associated services to the Moi Teaching and Referral Hospital of Eldoret and six sub county hospitals as well as the supply of medical equipment to fight Covid-19,” reads the report.

The other loan signed between the government and International Development Association on May 28, 2020 is for Sh4.98 billion as an emergency locust response project.

People Daily Team

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