Last week, investment bank Dyer and Blair released an analysis encouraging the Treasury to go for another Eurobond, saying the current Eurobond markets conditions are favourable. To me, this statement was concerning because the understanding about our current fiscal problems in general and the economic slowdown traced to debt accumulation pressure seems elusive out there.
To start with, the bank only compares syndicated loans against Eurobonds, identifying the former as the problems whilst encouraging the government to go for the latter. The argument is solid until Eurobonds are put into context. The global financial market is currently in the low interest rates regime, availability of cheap money, with advanced economies are offering record low rates.
But as observed by the International Monetary Fund, Eurobonds from low income countries have been around eigh percent which is expensive, and the Fund is concerned about the accumulation of these commercial loans at a period of low interest rates bearing in mind that its taxpayers in low-income countries who will be servicing these loans.
Secondly, the analysis missed the risky composition of Kenya’s public debt. Currently, 51 percent of Kenya’s public debt is held in external debt with 70 percent being in dollar denominations. Now, a slight macro-economic shock that can depreciate the shilling will lead to an increase in the cost of debt servicing as well as overall debt portfolio in dollar denomination.
We are already seeing the debt servicing burden taking a large portion of revenue consequently disincentivising government to make more public investment. Looking at the recently published Budget Policy Statement, the government is pushing for fiscal consolidation of the budget with county governments even denied additional Exchequer funds, but debt repayment is increasing putting revenue collection under more pressure. This is the situation that led countries like Indonesia, Mexico and Thailand into a debt crisis.
Third, the lack of full transparency by government on the national debt register is a time bomb. Under a programme about building transparency on national debt register by governments led by IMF, Senegalwhich was among the first to adopt was found to have under declared its public debt by 10 percent of GDP.
Many sub Saharan Africa countries are said to be under declaring their public debt by almost the same percentage. Now, if that is the case for Kenya, our public debt to GDP will be around 75 percent , significantly a debt crisis. Lastly, the analysis seems to have been done in isolation from Kenya’s fiscal sustainability assessment.
The bank analysts believe that government should opt for the Eurobond market as a stopgap measure to curb escalation of domestic interest rates. Now, a fiscal analysis informs that the problem about heavy government borrowing in the local market leading to escalation of domestic interest rates is because of the government’s expansionary budget expenditure.
In the abracadabra budget making process, Treasury has been massaging figures of Kenya’s fiscal deficit positions projecting a narrowing of the deficit when in actual sense it has been expanding.
Since the Jubilee government came to power, we have seen aggressive borrowing by government in both domestic and external markets so as to meet the government expenditure.
Therefore, the issue about domestic interest rates entirely lies with the government’s expansionary budget leading to heavy borrowing in both local and external market. But all said and done, debt-fueled economic growth is not a problem, countries just have to make the right public and social investment that possesses high economic returns as well as be prudent in debt management to ensure a sustainable fiscal position that provides insurance against macro-economic shocks.
In Kenya, we are seeing govt borrowing not to invest in public investment but to settle pending bills. In the coming months, the Treasury plans to issue first ever roads bond worth Sh150 billion part of which will be used to settle outstanding pending bills on on-going road projects estimated to be about Sh650 billion in total. Now, is that a sustainable fiscal trajectory we are in?