Kenya’s Treasury remains on a collision course not just with the IMF and business community — because it has not made a concerted effort to repeal or significantly modify the interest rate cap — but also with the Central Bank of Kenya (CBK), the central bank.
The Treasury’s Financial Markets Conduct Bill 2018 has been hastily written without consultation with the CBK and creates duplications and overlaps with the regulator. Mbui Wagacha, an advisor to President Uhuru Kenyatta and former CBK chair, called the draft law ‘irrelevant’ because it was written without any consultation from parliament and proposed the creation of the Financial Markets Conduct Authority that will compete with, and subsequently weaken, the CBK’s mandate.
The Treasury and the CBK are in a disagreement because of the latter’s recent — and repeated — warnings that there was no scope for the government to borrow more. CBK governor Patrick Njoroge said that ‘The headroom [for borrowing] has now decreased. We cannot continue borrowing for spending on even the good projects. We need to move into the non-debt financing of our development projects.’ The focus, he said, should shift towards the public private partnership model for further project financing.
Kenya’s public debt has increased since Kenyatta’s first term in the Presidency. Now into his second, the CBK puts Kenya’s outstanding public debt at KES4.9 trillion (US$48 billion) in March this year.
There are signs that the Treasury is frustrated with the CBK’s push back against greater domestic borrowing, and the efforts to set up the Financial Markets Conduct Authority may be an attempt to bypass CBK.
Cabinet Secretary for the Treasury, Henry Rotich, is clearly under political and international pressure given that he has supervised the massive surge in debt as well as the rising fiscal deficit during Kenyatta’s first administration. The Treasury’s recent action does not, however, seem to be curbing the problem but instead shows a willingness to bypass it.
One example was an attempt to amend the Public Finance Management (PFM) Act to redefine ‘public debt’ as ‘external guaranteed debt’, thereby effectively creating new room to borrow. The debt to GDP ratio is capped at 50%, and already stands at 49%. Removing domestic debt from this definition would bring the debt ratio formally down to 25%.
On the other hand measures planned to increase revenue collection — including by reintroducing VAT on fuel products and staple foods, and other items — will prove very unpopular. After several years of extensive budget deficits, Rotich has no track record in conservative fiscal management, and therefore limited credibility to do so. An increasing part of Kenya’s revenue collection will be absorbed by debt service, while development spending is expected to fall to its lowest level under Kenyatta’s tenure.
In addition to this, the Treasury also seeks to raise corporate income tax for companies above a certain threshold to 35% — the highest in the region — for companies with an annual income over KES500 million (US$4.9 million). This will raise concerns among the business community. Tightening the budget deficit is never popular. But there is more at stake if Kenya continues its borrowing spree.
This article was taken from our East Africa Politics & Security publication