Credibility.Professionalism.AccountAbility Presentation on Public Debt Management: The Case of Kenya Presentation at ICPAK PFM Conference at Sarova White Sands, Mombasa. CPA Fredrick Riaga-ICPAK

1. Introduction  Public debt- all financial obligations attendant to loans raised or guaranteed and securities issued or guaranteed by the National Government;  Why public debt? 1. A government, like any other economic unit, collects revenue & spends it. There’re instances when its expenditures will exceed its receipts and vice verse -Unevenness in receipts & expenditure flows, will, therefore, create only short term loan obligations of the government 2. Sudden surge in government expenditure- For instance-wars, natural calamities may force government to incur larger expenditure and run into a debt. Credibility.Professionalism.AccountAbility

Introduction- Legislative framework  Public Debt is a charge on the Consolidated Fund - Art 214;  Public debt may be internal/domestic or external  PFM Act, relevant legislation with regard to public finance management;  The Act repealed the External Loans & Credit Act, Internal Loans Act & the National Government Loans Guarantee Act- These provided a legal framework for Government to raise loans outside Kenya, within Kenya & to guarantee loans extended to public entities Credibility.Professionalism.AccountAbility

PFM ACT 2012: PROVISIONS ON DEBT MANAGEMENT Credibility.Professionalism.AccountAbility SectionProvision 49-65Prescribes for the receipt & use of grants & loans; guaranteeing loans, lending money; establishes a fully-fledged Public Debt Management Office(PDMO) in the National Treasury 49 Authority for borrowing by the National Government 50 Obligations and restrictions on national government guaranteeing and borrowing- Parliamentary approval …. Guarantee of debt shall be done in terms of criteria agreed with the Intergovernmental Budget & Economic Council(IBEC) 55Establishes the office of the Registrar of the National Government Securities under PDMO. Securities issued by or on behalf of the national government shall be published & publicized Establishes and empowers PDMO with objects of minimizing fdebt financing costs, maintaining relaiable debt data, prepare annual and medium-term debt strategy

Functions of Public Debt Management Office- Sec 63 of PFM Act Carry out the government’s debt management policy of minimizing its financing cost; 2. Maintaining a reliable debt data base for all loans taken by the National government, county governments & their entities; 3. Prepare & update the annual medium term debt management strategy including debt sustainability analysis; 4. Prepare & implement the national government borrowing plan including servicing of outstanding debts; 5. Acting as the principal in the issuance of Government debt securities on behalf of national treasury; 6. Monitor & evaluate all borrowing & debt related transactions among others Credibility.Professionalism.AccountAbility

2. Kenya’s public debt: Has risen.. Has risen..  As at June 2013, public debt stood at KES 1.9 trillion, of which:  Domestic: KES1.1 trillion  External: KES 0.8 trillion  Domestic debt has become dominant in debt portfolio. Source: Central Bank of Kenya, 2013

..but debt to GDP ratio has declined and remains relatively stable Credibility.Professionalism.AccountAbility  Ratio of nominal Debt/GDP has declined from a high of 77.4 % in June 2000 to 51.7% in June 2013  External debt to GDP ratio declined by nearly 50% over the period.  ratio of domestic debt to GDP has been relatively stable.  Prudent fiscal management and modest fiscal deficits helped safeguard Kenya’s debt position.

Current Public Debt Situation-Kenya- Ksh Million June 2010June 2011June 2012June 2013 Domestic Debt(Gross)660, ,222558,8301,050,555 As a % of GDP As a % of Total Debt External debt569,138722,888763,971843,562 As a% of GDP As a % of Total Debt GRAND TOTAL1, 229, 4061,487,1101,622,8011, 894,117 As % of GDP GDP2, 458, 4002, 787, 3003, 281, 2003, 662,600 Credibility.Professionalism.AccountAbility

TOTAL EXTERNAL DEBT- KSH. MILLIONS CLASSIFICATIONJune 2012June 2013Percent Change Bilateral199,950217, Multilateral451, , Commercial Banks50, 54058, Supplier Credits14, 81115, Guaranteed47, 38343, 537(8.1) GRAND TOTAL763, , Credibility.Professionalism.AccountAbility

EXTERNAL DEBT BY MAJOR CREDITORS CREDITOR% OF TOTAL EXTERNAL DEBT World Bank38.3% Others bilateral lenders14.3% Japan10.3% ADB/ADF9.6% IMF8.7% CHINA8.3% FRANCE5.6% GERMANY3.0% EUROPEAN UNION/EUROPEAN INVESTMENT BANK1.9 Credibility.Professionalism.AccountAbility

External debt is highly concessional Credibility.Professionalism.AccountAbility  Over 90% of external debt is owed to multilateral & bilateral creditors ( mostly IDA, ADB, Japan & China ).  Average terms of new external loans:  Interest rate- 1.8% p.a.  Maturity years  Grace period- 7.1 years  Grant element- 60.6%

Credibility.Professionalism.AccountAbility Preference for domestic debt  There has been a deliberate strategy to shift the composition of domestic debt away from Treasury Bills to Treasury Bonds.  rollover risk in the domestic debt portfolio is low

In the region, how does fair? Source: Central Bank of Kenya, 2013  A time to reflect?  Lack of access to debt relief (under HIPC or MDRI), a contributor?

Credibility.Professionalism.AccountAbility AFRICA’S DEBT SITUATION POST-DEBT RELIEF: FALLING EXTERNAL DEBT RATIOS Sub-Saharan Africa (SSA) debt to official creditors fell significantly in the 2000s in part due to: – rapid growth, – debt relief and – debt repayment by Nigeria, Angola, Malawi and others

OVERALL PUBLIC DEBT & DEBT SUSTAINABILITY IN KENYA Credibility.Professionalism.AccountAbility  Kenya’s debt grew by 15.62%, to KES 2.4 trillion in June 2014 from KES 2.11 trillion in December 2013 and KES 1.89 trillion in June 2013 against a GDP of KES 4.2 trillion;  Of the total, External Debt excluding the Eurobond was Ksh billion (43.74% ) while Domestic Debt totaled Ksh 1.23 trillion (56.26% ) as at May 2014;  Total debt stock at the end of May 2014 was equal to % of GDP compared with 49.87% of GDP in June 2013 and 55.60% in December 2013;  Government should monitor & evaluate this development to ensure sustainability & stability in the debt markets;  Robust Debt Sustainability Analysis is needed for updated assessment of the sustainability of public debt, including government guaranteed public debts.  Joint WB-IMF Debt Sustainability analysis (DSA) in April 2013 concluded that Kenya’s debt is sustainable.

WHY DEBT MANAGEMENT IS IMPORTANT Credibility.Professionalism.AccountAbility  Public debt portfolio is large and may pose substantial risk to the government’s balance sheet and the country’s financial stability – 57% of GDP as of June 2014;  If not managed prudently, poses risk to the budget and can lead to risk of default and large economic losses – PIGS+1 of Europe  Poor debt management practices can pose the following: (i)undermine investor sentiment and spark financial instability (i)increases a country’s susceptibility to crisis – vulnerability increases with high debt levels.  Good debt management makes countries less susceptible to financial crises Debt management is not a substitute for sound fiscal, monetary, and exchange rate policies

Credibility.Professionalism.AccountAbility Medium Term Debt Strategy: Medium Term Debt Strategy: Guides debt management operations...  Objective 1: To ensure that the government’s financing needs and its payment obligations are met at the lowest possible cost the medium to long run, consistent with a prudent degree of risk.  Objective 2: To promote the maintenance and further development of efficient primary and secondary markets for domestic government securities.  The 2012 MTDS shows Kenya’s debt portfolio has an optimal cost/risk mix.

THE “ PIGS + 1” Credibility.Professionalism.AccountAbility

Way Forward on External Debt  External Loans and Grants should be directed ONLY to development expenditure to increase development results;  Government needs to put a cap on the % of external resources to the Total National Budget. We propose 10% at most to curb overdependence on external financing;  Develop and implement a reporting, monitoring and evaluation framework for external resources to ensure aid effectiveness and efficiency.  National Government should spearhead efforts to capacity build County Governments on efficient utilization and management of External Resources; Credibility.Professionalism.AccountAbility