Kenya is not broke. The Government still has resources that it depends on and has the ability to tax. It has over six billion of foreign exchange reserves and has a rating that allows it to borrow cash.
A sovereign like Kenya can also never go broke in terms of the liabilities it issues in its own currency. The government, however, does have cash flow and liquidity issues arising mostly from poor planning. Even the richest corporates or banks can collapse if cash flow is not well managed. A government is no different.
So why is the government having problems meeting its obligations as they fall due?
First, Not enough revenue is being collected and donor disbursements are lagging. The fiscal mathematics of any budget hinges on one key assumption: The projection for revenue growth over the course of the year. In the last budget, The National Treasury projected revenues of Sh1.358 trillion (20.8 per cent of GDP) based on the assumption of a 6.5 to 7 per cent economic growth rate.
We said then that this was unrealistic. Just a day before CS Henry Rotich read the budget, the MPC embarked on an interest rate tightening phase and the economic growth projections on which these revenues were forecasted became faulty ab initio.
In the first two months of the fiscal year, only a small percentage of that target had been met and if the current trend holds till the end of the fiscal year, Treasury is going to miss the revenue target by a wide margin.
Second, prudent financial management requires good debt management strategies. As our debt grows and its role as a major instrument for financing government needs is enhanced, debt management decisions become very important as part of our fiscal strategy.
Our debt strategies and planning must take into account the level of debt that can be financed over a determined period of time without an unrealistically large future correction to the balance of income and expenditures.
Equally important is the management of the composition and structure of our debt portfolio in order for its cost to be low and for it to be as less vulnerable as possible to market shocks. The debt portfolio is highly vulnerable to financial, fiscal and macroeconomic conditions, and it is important that its structure, level and composition intended to reduce those vulnerabilities is soundly managed.
The Kibaki administration did this very well. The overall size was about right, the mix between domestic and foreign debt was optimal and that administration did lengthen the average duration of our domestic debt meaning there was less pressure to refinance the debt at any one time.
Debt servicing costs was also way below what we spent on development meaning we were not limiting our capacity to fund development and other emerging priorities or seek heavy donor involvement. In the last two years, however, Treasury seems to struggle with debt management.
The IMF's latest review has pointed out the fact that lack of capacity in the debt management department and poor coordination among government's entities,rather than inability to pay, having led to external debt repayments not being made on time.
As a result of these failures, the National Treasury has now been forced to agree to a pre-emptive approach to the processing of debt repayments where the payment process will start 30 days before the due date. Of course, this has impact on the Government's cash flow timings.
If the Treasury of a bank did this, heads would roll on account of poor cash-flow management. However, government bureaucrats can get off scot-free literally using the sovereign crutches.
Domestic debt, which is not only a big chunk of the governments liabilities, but also more expensive and short-term is also all over the place. We have a small capital market that is not deep and we have limited access to international markets.
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This means we not only face a big debt rollover risk but liquidity risk also becomes of special relevance in some short periods. A proper government cash flow and debt management process is therefore absolutely vital to ensure not too much domestic debt matures at the same time.
A robust process would, for example, reveal how loans contracted in earlier years will affect government cash-raising now and in the future. There will be refinancing risk if a large chunk of government debt comes due at the same time. National Treasury's own figures reveal that the country faces massive repricing and rollover risks in 2016.
Why was this allowed to happen? It looks like a case of the government issuing too much short-dated debt instead of long-dated benchmark bonds to reduce interest expenses rather than adopt debt management strategies that would also ensure balance between reducing costs and reducing rollover risks.
Reducing cost implies issuing short-term debt while reducing rollover risk implies issuing long-term debt.
Finally, the Central Bank of Kenya (CBK) must decide what is the priority for our economy. Its current lack of focus and trying to do everything is causing the economy a lot of pain. It has been trying to defend the shilling, tackle inflation and push growth, all at the same time. In the process, it has managed to do none well and lost rhythm.
The fight that the CBK has put up over the shilling by tightening liquidity is hurting the economy.
The current high interest rates, if sustained for a while, is bad for the economy. It would impact on economic growth and will also push households and corporate borrowers over the default cliff. It is a risk to financial system stability and is already hurting the stock market.
The CBK should focus on using its monetary policy tools to stabilize and help the real economy rather than be obsessed with inflation targeting and managing the exchange rate.
A weak shilling is not as disastrous as high interest rates or liquidity tightening due to which the expected growth is only around five per cent.