The Parliamentary Budget Office (PBO) has warned that increasing the debt ceiling to Sh9 trillion as proposed in amendments to Public Finance Management (PFM) regulations will drastically reduce allocations to counties.
As of June, public debt stood at Sh5.81 trillion, equivalent to 61.8 percent of the Gross Domestic Product (GDP) and higher than the 50 percent threshold in the PFM regulations.
A document prepared by the PBO and presented to Senate says Kenya’s high level public debt narrows the window for future borrowing and increases vulnerability to fiscal risk and possible debt distress, and may have dire consequences to fiscal stability and sustainability of the 47 county governments.
The PBO further notes that increasing the debt ceiling as proposed by the National Treasury will lead to an increase in external borrowing mainly from commercial sources that are more expensive and will further reduce the proportion of ordinary revenue available to counties in financial year 2020/21.
“The proposals to open up the debt ceiling to Sh9 trillion will further drop the percentage of equitable share. There is no evidence indicating whether the debt ceiling provides a window for national government guarantees of borrowing to county governments,” the document reads.
The PBO is a non-partisan professional office of Parliament, whose primary function is to provide professional services on budget, finance and economic information to parliamentary committees.
Its argument is based on the fact that under Article 203 (1) of the Constitution, public debt is the second charge on the Consolidated Funds after national interests and is followed by the needs of the national government.
The document further notes that allocations to interest payments grew at six percent between financial years 2014/15 and 2019/20, indicating mounting pressure on the government’s capacity to repay loans.
“Growth in debt repayment therefore means there is less to be shared between the national and county governments, hence the drop in projected allocations to counties in financial year 2019/20,” the PBO says.
It adds, "This will have direct implications on the level of funds that counties can commit to improvement service delivery.”
The PBO further warns that amending the regulations will be against the East Africa Community treaty (EAC).
Kenya is a signatory to the EAC Monetary Union Protocol that provides that in the convergence criteria, member countries will endeavour to achieve a public debt ceiling of 50 percent of the GDP in Net Present Value (NPV) terms by 2021.
Currently, the PFM regulations provide that the national public debt shall not exceed 50 percent of GDP in net present value terms.
But Treasury wants this amended and replaced with a numerical set limit of Sh9 trillion, which effectively does away with the provision of net present value of total public debt.
With the National Assembly having already approved the Treasury proposal, the onus is on the Senate.
A joint sitting of the Senate committees on Delegated Legislation, and Finance and budget, will make a determination on Monday in a report to be approved by the House.
A rejection of the regulations by the Senators will mean the Treasury will have lost the battle and that the status quo will remain.
The county allocation as a proportion of ordinary revenue has been an average of 22 percent from financial year 2014/15 to 2017/18.
However, this dropped to 18 percent in the year 2018/19 and reduced further to 17 percent in the year 2019/20.
It is also important to note that the equitable share to county governments has consistently been dropping from a high of 4.40 percent of GDP in financial year 2013/14 to a low of 2.94 percent of GDP in the year 2019/2020, according to data from the National Treasury.
The National Treasury further projects that the equitable share to counties will further drop to 2.61 percent in the year 2020/21 and 2.20 percent in the year 2022/23.
Other than the Constitution, the EAC treaty and the PFM Act, 2012 and its regulations of 2015, public debt is also provided for in the repealed Internal Loans Act and the External Loans Act.
