1. Credibility.Professionalism.AccountAbility Presentation on Public Debt Management: The Case of Kenya Presentation at ICPAK PFM Conference at Sarova White Sands, Mombasa. CPA Fredrick Riaga-ICPAK

2. 1. Introduction  Public debt- all financial obligations attendant to loans raised or guaranteed and securities issued or guaranteed by the National Government;  Why public debt? 1. A government, like any other economic unit, collects revenue & spends it. There’re instances when its expenditures will exceed its receipts and vice verse -Unevenness in receipts & expenditure flows, will, therefore, create only short term loan obligations of the government 2. Sudden surge in government expenditure- For instance-wars, natural calamities may force government to incur larger expenditure and run into a debt. Credibility.Professionalism.AccountAbility

3. Introduction- Legislative framework  Public Debt is a charge on the Consolidated Fund - Art 214;  Public debt may be internal/domestic or external  PFM Act, 2012 - relevant legislation with regard to public finance management;  The Act repealed the External Loans & Credit Act, Internal Loans Act & the National Government Loans Guarantee Act- These provided a legal framework for Government to raise loans outside Kenya, within Kenya & to guarantee loans extended to public entities Credibility.Professionalism.AccountAbility

4. PFM ACT 2012: PROVISIONS ON DEBT MANAGEMENT Credibility.Professionalism.AccountAbility SectionProvision 49-65Prescribes for the receipt & use of grants & loans; guaranteeing loans, lending money; establishes a fully-fledged Public Debt Management Office(PDMO) in the National Treasury 49 Authority for borrowing by the National Government 50 Obligations and restrictions on national government guaranteeing and borrowing- Parliamentary approval …. Guarantee of debt shall be done in terms of criteria agreed with the Intergovernmental Budget & Economic Council(IBEC) 55Establishes the office of the Registrar of the National Government Securities under PDMO. Securities issued by or on behalf of the national government shall be published & publicized 62 - 63Establishes and empowers PDMO with objects of minimizing fdebt financing costs, maintaining relaiable debt data, prepare annual and medium-term debt strategy

5. Functions of Public Debt Management Office- Sec 63 of PFM Act 2012 1. Carry out the government’s debt management policy of minimizing its financing cost; 2. Maintaining a reliable debt data base for all loans taken by the National government, county governments & their entities; 3. Prepare & update the annual medium term debt management strategy including debt sustainability analysis; 4. Prepare & implement the national government borrowing plan including servicing of outstanding debts; 5. Acting as the principal in the issuance of Government debt securities on behalf of national treasury; 6. Monitor & evaluate all borrowing & debt related transactions among others Credibility.Professionalism.AccountAbility

6. 2. Kenya’s public debt: Has risen.. Has risen..  As at June 2013, public debt stood at KES 1.9 trillion, of which:  Domestic: KES1.1 trillion  External: KES 0.8 trillion  Domestic debt has become dominant in debt portfolio. Source: Central Bank of Kenya, 2013

7. ..but debt to GDP ratio has declined and remains relatively stable Credibility.Professionalism.AccountAbility  Ratio of nominal Debt/GDP has declined from a high of 77.4 % in June 2000 to 51.7% in June 2013  External debt to GDP ratio declined by nearly 50% over the period.  ratio of domestic debt to GDP has been relatively stable.  Prudent fiscal management and modest fiscal deficits helped safeguard Kenya’s debt position.

8. Current Public Debt Situation-Kenya- Ksh Million June 2010June 2011June 2012June 2013 Domestic Debt(Gross)660, 268764,222558,8301,050,555 As a % of GDP26.927.426.228.7 As a % of Total Debt53.751.452.955.5 External debt569,138722,888763,971843,562 As a% of GDP23.225.923.323.0 As a % of Total Debt46.348.647.144.5 GRAND TOTAL1, 229, 4061,487,1101,622,8011, 894,117 As % of GDP50.053.449.551.7 GDP2, 458, 4002, 787, 3003, 281, 2003, 662,600 Credibility.Professionalism.AccountAbility

9. TOTAL EXTERNAL DEBT- KSH. MILLIONS CLASSIFICATIONJune 2012June 2013Percent Change Bilateral199,950217, 9709.0 Multilateral451, 287507, 92012.5 Commercial Banks50, 54058, 92816.6 Supplier Credits14, 81115, 2072.7 Guaranteed47, 38343, 537(8.1) GRAND TOTAL763, 971843, 56210.4 Credibility.Professionalism.AccountAbility

10. EXTERNAL DEBT BY MAJOR CREDITORS CREDITOR% OF TOTAL EXTERNAL DEBT World Bank38.3% Others bilateral lenders14.3% Japan10.3% ADB/ADF9.6% IMF8.7% CHINA8.3% FRANCE5.6% GERMANY3.0% EUROPEAN UNION/EUROPEAN INVESTMENT BANK1.9 Credibility.Professionalism.AccountAbility

11. External debt is highly concessional Credibility.Professionalism.AccountAbility  Over 90% of external debt is owed to multilateral & bilateral creditors ( mostly IDA, ADB, Japan & China ).  Average terms of new external loans:  Interest rate- 1.8% p.a.  Maturity- 23.1 years  Grace period- 7.1 years  Grant element- 60.6%

12. Credibility.Professionalism.AccountAbility Preference for domestic debt  There has been a deliberate strategy to shift the composition of domestic debt away from Treasury Bills to Treasury Bonds.  rollover risk in the domestic debt portfolio is low

13. In the region, how does fair? Source: Central Bank of Kenya, 2013  A time to reflect?  Lack of access to debt relief (under HIPC or MDRI), a contributor?

14. Credibility.Professionalism.AccountAbility AFRICA’S DEBT SITUATION POST-DEBT RELIEF: FALLING EXTERNAL DEBT RATIOS Sub-Saharan Africa (SSA) debt to official creditors fell significantly in the 2000s in part due to: – rapid growth, – debt relief and – debt repayment by Nigeria, Angola, Malawi and others

15. OVERALL PUBLIC DEBT & DEBT SUSTAINABILITY IN KENYA Credibility.Professionalism.AccountAbility  Kenya’s debt grew by 15.62%, to KES 2.4 trillion in June 2014 from KES 2.11 trillion in December 2013 and KES 1.89 trillion in June 2013 against a GDP of KES 4.2 trillion;  Of the total, External Debt excluding the Eurobond was Ksh 957.89 billion (43.74% ) while Domestic Debt totaled Ksh 1.23 trillion (56.26% ) as at May 2014;  Total debt stock at the end of May 2014 was equal to 57.66 % of GDP compared with 49.87% of GDP in June 2013 and 55.60% in December 2013;  Government should monitor & evaluate this development to ensure sustainability & stability in the debt markets;  Robust Debt Sustainability Analysis is needed for updated assessment of the sustainability of public debt, including government guaranteed public debts.  Joint WB-IMF Debt Sustainability analysis (DSA) in April 2013 concluded that Kenya’s debt is sustainable.

16. WHY DEBT MANAGEMENT IS IMPORTANT Credibility.Professionalism.AccountAbility  Public debt portfolio is large and may pose substantial risk to the government’s balance sheet and the country’s financial stability – 57% of GDP as of June 2014;  If not managed prudently, poses risk to the budget and can lead to risk of default and large economic losses – PIGS+1 of Europe  Poor debt management practices can pose the following: (i)undermine investor sentiment and spark financial instability (i)increases a country’s susceptibility to crisis – vulnerability increases with high debt levels.  Good debt management makes countries less susceptible to financial crises Debt management is not a substitute for sound fiscal, monetary, and exchange rate policies

17. Credibility.Professionalism.AccountAbility Medium Term Debt Strategy: Medium Term Debt Strategy: Guides debt management operations...  Objective 1: To ensure that the government’s financing needs and its payment obligations are met at the lowest possible cost the medium to long run, consistent with a prudent degree of risk.  Objective 2: To promote the maintenance and further development of efficient primary and secondary markets for domestic government securities.  The 2012 MTDS shows Kenya’s debt portfolio has an optimal cost/risk mix.

18. THE “ PIGS + 1” Credibility.Professionalism.AccountAbility

19. Way Forward on External Debt  External Loans and Grants should be directed ONLY to development expenditure to increase development results;  Government needs to put a cap on the % of external resources to the Total National Budget. We propose 10% at most to curb overdependence on external financing;  Develop and implement a reporting, monitoring and evaluation framework for external resources to ensure aid effectiveness and efficiency.  National Government should spearhead efforts to capacity build County Governments on efficient utilization and management of External Resources; Credibility.Professionalism.AccountAbility