Intrigues of the Sh608b debt CS Yatani omitted from his budget speech

Treasury CS Ukur Yatani presents the 2021/22 budget to the National Assembly, on Thursday, June 10 2021 [David Njaaga, Standard]

When Treasury Cabinet Secretary Ukur Yatani read his budget speech on Thursday, he surprised journalists and pundits by saying that the total budget for Kenya would be Sh3.03 trillion.

For a while, news outlets had been awash with Sh3.66 trillion as the country’s total budget for the Financial Year 2021/22.

Alas, it was the same Yatani who had earlier tabled a report in the National Assembly, putting the country’s total spending plan at Sh3.66 trillion for the financial year starting next month.

If Kenyans suspect foul play from the National Treasury, the ministry did not make things any better with a typo in one of its documents on the budget - The Mwananchi Guide Guide - which talked of the expenditure of Sh3,030.3 billion, excluding “redemptions of Sh608.9 million.” Was it Sh608.9 million or Sh608.9 billion?

Anyway, the keyword was “redemptions”, which is what had been left out of the computation of the country’s total spending for the next 12 months to June next year.

Redemption of debt simply refers to the repayment of a public loan.

Although public debt should be paid, debt redemption is desirable, too. In order to save the government from bankruptcy and to raise the confidence of lenders, the government has to redeem its debts from time to time.

It is this debt redemption that is bringing the difference, and it is worth Sh608.9 billion.

The breakdown of redemptions puts internal and external redemptions at Sh346 billion and Sh262.1 billion, respectively, said Churchill Ogutu, the head of research at Genghis Capital, an investment bank.

Treasury does not think that redemptions should be included in the computation of the total budget. Critics think Treasury is playing games, and have been using this to suppress the actual size of the budget.

Sarah Wanga, the head of research at AIB Capital, an investment bank, insisted the CS is not trying to fool Kenyans. It is only that the approach that he took in the budget speech was different from the one he had taken in the budget estimates books, she said. But that is confusing people; why can’t they just adopt a single way of reporting?

A source at Parliamentary Budget Office (PBO), an advisor to the National Assembly, while agreeing that it was about a difference in approach, said the size of the budget for them is Sh3.66 trillion.

The Sh608 billion that was not captured, said the source, is considered a “below the line cost” that some accountants do not think it should be included.

“I am not an accountant myself so I include it,” said the PBO source.

The National Treasury and Planning CS Ukur Yattani at Treasury building on his way to present the Financial Year 2021/2022 budget at Parliament Buildings, Nairobi. June 10, 2021. [Jonah Onyango, Standard]

Abraham Rugo, the country manager for the International Budget Partnership, a non-governmental organisation, said that this figure is a liability that has been increasing over the years. It should, he insisted, ideally be included in the government’s computation of debt.

The reason the figure is not being included in the computation, said Rugo, is that perhaps Treasury and creditors, mostly local creditors, had not agreed on the method of redemption.

One form of debt redemption is refunding of debt. This implies that the government issues new bonds and securities - kind of debts - for raising new loans to pay off the matured loans.

The reason Treasury does not include the figure in its computation is that it is an amount that does not have to be approved because it had already been approved, or technically, been appropriated long ago.

But this figure has been rising, almost by Sh100 billion every year, said Rugo. “We have asked Parliament to pay close attention to this redemption,” Rugo said.

It is like Treasury is just kicking the can down the road.

Above the line expenditures which added up to Sh3.03 trillion include wages, interest payments, pension, development expenditure, contingency fund and disbursements to counties.

But there is also refinancing of external loans (repaying a loan that is maturing with another loan), estimated at Sh351 billion in the Budget Policy Statement 2021, a document that sets forth the official government policy. For this, Treasury will borrow a similar amount of money to repay the loan.

Oftentimes, countries refinance to take advantage of low external rates.

“Remember that the debt being refinanced is external debt and because of Covid-19, it has driven global rates to low levels, and this is the overarching argument that new loans can be issued at lower rates, hence the need of refinancing the expensive debt,” said Ogutu.

Ogutu said the government agreed with the International Monetary Fund to refinance expensive debt to reduce debt vulnerabilities.

Kenya has been allowed to borrow up to Sh500 billion to refinance external loans - borrowing from Peter to pay Paul.

But there is also refinancing risks that have resulted in an increase in interest payment which has in return led to more taxes going into paying loans.

What stands out as a major risk is the fact that the syndicated loans - borrowed from commercial banks - are the ones earmarked to be refinanced, said Ogutu.

“The thing is, once you refinance a syndicated loan, fine you take advantage of the current low rates which has an influence on the benchmark. But the low rates will not stick forever, ultimately they’ll start climbing up and we’ll be back to the problem we’re trying to resolve at the moment,” he said.