An advisory organ to the Legislature has warned senators against ratifying the intended move by the Executive to raise the debt ceiling to Sh9 trillion, saying it would have grave effects on the economy.

Senators are this week scheduled to amend the Public Finance Management (PFM) regulations when they resume sittings tomorrow. The National Assembly has already approved the proposal.  

The debt cap proposal is among fiscal consolidation measures by the National Treasury to tame the rising debt that hit the Sh6 trillion mark in August.

Treasury wants the Public Financial Management Act amended to delete the words “50 per cent of gross domestic product in net present value terms” and replace it with “nine trillion shillings.”

The Parliamentary Budget Office (PBO), has argued that the high level of public debt puts the country at the risk of being unable to borrow in the future, threatens economic stability and may put a country at a situation where it will be struggling to service its debts.

Additional loans 

“The high level of public debt in Kenya narrows the window for future borrowing, and increases vulnerability to fiscal risk and possible debt distress which if it materialises, may have dire consequences to fiscal stability and sustainability of county governments,” PBO said in a brief to senators.

PBO is a non-partisan professional body whose primary function is to provide professional advice in respect to the budget, finance and economic information to committees of Parliament.

Senate committees on Delegated Legislation and Finance and Budget are today expected to prepare its report to the senators as to whether to approve or reject the National Treasury’s proposal.

PBO has also warned that increasing the debt ceiling is likely to alter the approved borrowing framework for financial year 2019/20  out of which 38 per cent  is for external borrowing and 62 per cent domestic borrowing.

According to PBO, this is because additional borrowing will increase chance of additional loans from external sources because domestic borrowing is not a viable option. 

“Increasing the debt ceiling is likely to give more room for borrowing which will be inconsistent with the approved fiscal consolidation path for the financial year 2019/20 and the medium term.”

 The effect of it is that if the debt limit is set at Sh9 trillion, the country will be moving away from the fiscal consolidation path and the targets will be surpassed much earlier than expected. Therefore, before approving the amendment, there is need to consider the trends in the fiscal deficit and the fiscal consolidation path,” reads the brief in part.

BPO also warned that increasing the debt ceiling will lead to external borrowing and mainly from commercial sources which are more expensive given that the interest rates are higher with a shorter pay-back period.

 Equitable share

As at June, the total public debt stood at Sh5.81 trillion, representing  61.8 per cent of nominal Gross Domestic Product (GDP), which indicates that the debt to GDP  is higher than the 50 per cent threshold provided in the PFM regulations. Currently, PFM regulations provide that the national public debt shall not exceed 50 per cent of GDP in net present value terms.

Further, PBO has also warned that the move will lead to a reduction on the allocations to County governments.

According to PBO, increasing the debt ceiling will fan distortion of revenue sharing between the national and county governments because the higher share of ordinary revenue will be taken up by public debt at the expense of other national obligations.

 “The equitable share to county governments has consistently been dropping from a high of 4.40 per cent of GDP in the financial year 2013/14 to a low of 2.94 per cent of GDP in the financial year 2019/20. The National Treasury projects that the equitable share will further go down to 2.61 per cent in the financial year 2020/21 and 2.20 per cent in the financial year 2022/23,” reads the brief.

PBO argues that increasing the debt ceiling would lead to an increase in borrowing which will further reduce the proportion of ordinary revenue available to counties in the financial year 2020/21.

It cautioned that by increasing the ceiling, the country will likely not comply with the East African Community (EAC) Monetary Union Protocol ratified by Parliament.

The protocol provides that in the convergence criteria; member countries will endeavour to achieve a public debt ceiling of 50 per cent of the GDP in Net Present Value (NPV) terms by 2021.