MPs reject Treasury’s plan for new fund to repay costly loans

 

Hon. Amb. Ukur Yatani, Cabinet Secretary for National Treasury and Planning [Wilberforce Okwiri, Standard]

Lawmakers have rejected a Bill by the National Treasury to create a special fund that was supposed to help the government repay expensive loans.

The Committee on Delegated Legislation asked the National Assembly to annul the proposed law for contravening certain constitutional requirements, including public participation.

“The committee recommends that the House annuls in entirety the said statutory instrument for failing to demonstrate that sufficient public participation was undertaken contrary to Articles 10 and 118 of the Constitution,” said the committee in its report tabled in the National Assembly on Tuesday.

The William Kamket-led committee noted that Treasury did not provide them with information to show that the public had been consulted on the making of the Bill.

For example, such details as the dates and responses were lacking in the explanatory memorandum submitted in Parliament.  

According to the lawmakers, the Public Finance Management (Sinking Fund) Guidelines, 2021 also contravened sections 5, 5A and the Schedule to the Instruments Act adding that a regulatory impact statement was also not submitted.

Correct mispricing

This is a blow to the Treasury as it had hoped to use the “Sinking Fund” to reduce its debt repayment burden, which has been getting heavier, with most of the taxes going to service loans.

In the first two months of the current financial year that ends in June 2022, for every Sh100 that the Kenya Revenue Authority (KRA) collected, Sh65 was used to repay both domestic and foreign debts.

The taxman collected Sh247.1 billion in taxes, with the National Treasury using Sh162.4 billion to service debts.

The fund would have been used for amortisation of liabilities, debt restructuring, and redeeming of maturing government loans.

The fund, which was supposed to be appropriated by Parliament, was also supposed to build up resources for meeting maturities of loans and securities issued in the domestic and international debt markets.

The Bill was also supposed to correct any mispricing along the yield curve, a graph that depicts how the yields on debt instruments vary as a function of the years remaining to maturity. It is a proxy for investor sentiment on the direction of the economy.

It would also be used to buy back the national government loan obligation in the debt market, meet the costs of switches and early redemption of national debt and meet costs associated with such loans.

The committee said the guidelines contravened a clause in the Statutory Instrument Act, with the enabling provision invoking the wrong reference as it was made under the Public Finance Management (National Government) Regulations, 2015.

The committee further explained that while the Public Finance Management Act, 2012 allowed the Treasury Cabinet Secretary to establish a sinking fund for the redemption of loans raised under the Act by the national government, this should have been done by way of affirmative resolution.

“The publication of the guidelines are, therefore, a contravention of section 13(a) of the Statutory Instruments Act (No. 23 of 2013,” said the committee.

The governance structure of the fund included an advisory committee, fund administrator, and the secretariat, who would be appointed by the CS.

The Exchequer had estimated that savings from this reform would yield savings of between four and five per cent of interest costs, which Treasury reckoned would be a significant saving for a middle-income country.

When the market is good, the government would tap cheap loans and pump them into the Sinking Fund, which would, in turn, be used to offset expensive loans and create additional fiscal space to support priority development expenditures.

Treasury had told the MPS that debt service is expected to rise over time as a percentage of revenue and the reform was, therefore, intended to address this challenge.

The Sinking Fund was also to earn income through the investment of resources in the fund.