Treasury is inviting public consultations on new proposals aimed at managing public debt in the country key  among them is capping of public debt at 55 per cent of gross domestic product (GDP) rather than the current ceiling of Sh9 trillion.

“The Cabinet Secretary shall at all times maintain public debt at a level not exceeding 55 per cent of gross domestic product in present value terms,” the Treasury said in its proposed amendment.

“Provided that if, at any time, the public debt exceeds the limit set under the Act and these regulations, the Cabinet Secretary shall provide to Parliament a written explanation on the said circumstances leading to the breach of the limit and provide a time-bound remedial plan.”

This, the Treasury said was to conform with the international best practice in setting debt limits (setting debt limits on the basis of payment capacity.

Gerishon Ikiara, a Senior Economics Lecturer at the University of Nairobi said the move by Treasury shows realisation that if you put a figure like Sh9 trillion, it is very tricky, so they are trying to get a flexible way of managing debt.

Borrow more

“This is a good move since it allows the government to borrow more as the GDP increases. Debt is good, it is only bad when the money cannot be accounted for,” he said. 

This means that the debt ceiling will be floating and increasing with the increasing GDP and decreasing during times of recession as GDP shrinks. But developing countries are less likely to experience recessions unless under unusual circumstances.

However, the Treasury also added that, there are circumstances under which the debt limit may be exceeded such as depreciation of the shilling, significant balance of payment imbalances or abrupt fiscal disruptions and therefore there is need to address such eventualities in law.

The amendment of the Public Finance Management Act will also see the formation of the Public Debt Management Office to help check the excesses of the Treasury.

The Act is also calling for the capping of county debt at 20 per cent of its revenue. In the new proposals the county debt shall be called debt and not public debt.

“Objectives of county debt management are to ensure that county governments’ financing needs and payment obligations are met at the lowest possible cost over the medium to long term, with a prudent degree of risk,” the legal notice said.

Public debt management office will be able to advise the executive and the Parliament on the status of public debt.

“The Bill seeks to amend the Act by introducing a new paragraph in section 63 to add functions of the Public Debt Management Office to include advising Parliament and the Cabinet Secretary on the sustainable levels of public debt and the annual borrowing limit,” says Treasury.

MPs in a report on the Budget Policy Statement said there was to have a public debt  management office to ensure that public debt does not run out of control as they could not the National Treasury with the matter.

The MPs observed that the Treasury may be forced to request for an increase on the debt ceiling soon. In this year’s budget policy statement the Treasury had sought for a budget deficit of KSh846 billion.

Financial year

“It is forecasted that by June 2022 the stock of debt will amount to Sh8.6 trillion which means that the only amount available for the next financial year without removal of the ceiling is KSh400 billion,” the Parliament said. The National debt shall also be called public debt instead of National debt.