Risk concerns over State domestic borrowing

Kenya’s debt crisis could destabilise financial institutions if the government does not put in place checks and balances to manage borrowing.

The Senate Committee on Finance and Budget warns in a new report this is on the back of increased domestic borrowing as the country struggles with an uneven debt servicing ratio against collected revenues.

The report released last week says domestic debt currently stands at Sh3.7 trillion, accounting for 48 per cent of the total debt.

A bulk of the domestic debt is owed to commercial banks at 49 per cent, with non-banking financial institutions, including pension funds and insurance companies, taking up 48 per cent and the Central Bank of Kenya (CBK) holding two per cent.

This means the government has borrowed Sh1.8 trillion from commercial banks and almost a similar amount from pension funds and insurance companies.

Many Kenyans have invested in listed insurance companies or saved in pension funds. These companies, in turn, reinvest the cash in money market funds and government securities.

The Senate committee said unchecked domestic borrowing by the government is a major cause for concern.

“This indicates the risk exposure of the domestic financial market should debt servicing concern rise,” says the committee in the report.

The debt is mainly held in the form of treasury bonds (77 per cent) followed by treasury bills (20 per cent).

“The country has been borrowing more of treasury bonds than treasury bills (that mature within one year) in order to reduce the rate of refinancing pressure and pushing repayment further into medium-term,” says the report.

The nine-member committee led by Kirinyaga Senator Charles Kibiru notes that domestic debt is critical for cash flow management, maintaining the depth of domestic financial markets and cushioning the economy against erratic external vulnerabilities.

On the other hand, external debt finance, which currently stands at Sh4.5 trillion, has the benefits of increasing foreign exchange reserves and preventing the crowding out of the private sector.

“However, it also increases vulnerability to external conditions and if contracted at a high interest rate (through use of commercial debt as opposed to concessional debt), it could increase in debt servicing expenditure – especially when coupled with exchange rate volatility,” says the report.

The Senate committee warned that under the prevailing debt situation, Kenyans’ funds are exposed.

“While this (domestic borrowing) promotes a healthy financial system, it also indicates that risk exposure in case of debt distress would largely affect banks and pension funds,” the report warns.

It also notes that there are instances where the government has borrowed from the domestic market to pay foreign debt.

“For instance, on August 16, 2021... public debt repayment request amounting to Sh15 billion was towards syndicated loans repayment,” reads the report.

Kenya’s public debt currently stands at Sh7.71 trillion and has already surpassed the Sh9 trillion ceiling by Sh20 billion as stipulated in Public Finance Management Act 2012 when undisbursed loans are factored in.

The country has an undisbursed loan commitment of Sh1.31 trillion.

According to the report, for every Sh10 collected by the Kenya Revenue Authority (KRA), Sh6 goes into servicing debt.

As of June this year, the country’s debt servicing expense stood at Sh1.17 trillion, up from Sh230 billion in 2014. It is estimated to hit Sh1.69 trillion by June 2024.

Between July and August this year, while the total tax collected was Sh253.5 billion, public debt took up Sh162.37 billion, constituting 64.1 per cent of total tax revenue collected.

“As of June 2014, it only accounted for 25 per cent of total ordinary revenues and 66 per cent as of June 2021. This indicated an increasingly constrained fiscal space and the need to undertake debt restructuring in order to release resources for other budgetary needs,” says the Senate committee in the report.