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WEHLIYE: Debt: It’s poor management, not size

by kenya-tribune

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In the university, a supplementary exam is a second chance to pass a subject. Students would normally cut short their holidays to sit ‘sups’.

Hence, the National Treasury and the National Assembly have had their holidays cut short to work on a supplementary budget before even the 2018/19 books opened.

The good news is that this can be used to stave off a full-blown cash flow and macroeconomic crisis. The bad news? It won’t happen.

Looking at the Treasury statement, it seems Cabinet Secretary Henry Rotich has avoided the hard choices and gone for cosmetic changes.

The main purpose of a budget should be to set priorities and make the necessary trade-offs. The statement, which the House was to debate, fails that test.

So much is wrong with the 2018/2019 Budget that we don’t even know its size.

Mr Rotich put total expenditure at Sh2.55 trillion; the budget out-turn of the July gazette notice had it at Sh2.629 trillion. His statement wants grand total expenditure reduced from Sh3.026 trillion to Sh2.971 trillion. It is a dog’s breakfast!

If you cannot accurately measure or estimate it well, you definitely cannot manage it. There has been a lot of talk and focus on the size of the national debt and little on its mismanagement.

Prudent management of government finances requires debt strategies and planning that take into account the level of debt that can be financed over a determined period without an unrealistically large future correction to the balance of income and expenditures.

It is because that was not done that we have had a National Assembly session this week. Equally important is the management of the composition and structure of the debt portfolio for its cost to be low and for it to be as less vulnerable as possible to market shocks.

The current debt portfolio is highly vulnerable to financial, fiscal and macroeconomic conditions.

The overall size is not right, the mix between domestic and foreign debt not optimal and the administration has shortened the average duration of the debt from over nine years to almost four — meaning there is more pressure to refinance the debt at any one time.

That is influencing the economy inversely in the form of high debt-servicing costs, leading to decreased expenditure on development.

Debt servicing costs, at more than Sh800 billion, are way above development spending. That is likely to worsen, given that we have to refinance over Sh200 billion of maturing foreign currency-denominated commercial debt.

And we would have to do it without the insurance programme from the IMF. The World Bank’s latest review has pointed out the weak capacity of the Debt Management Office (DMO) and its lack of clear leadership and accountability.

It says although the Treasury publishes Debt Management Strategy papers, it isn’t clear that this is being followed. Even the publication of monthly debt bulletins on its website ceased last year.

The only way out of the current budget problems and a potential debt crisis is to manage the debt portfolio well.

The best strategy is to substantially reduce the deficit to less than five percent. You cannot get that right if your revenue projections are always wrong — or pie in the sky.

The fiscal mathematics of any budget hinges on one key assumption: The projection for revenue growth.

The Treasury projects revenues of Sh1.9 trillion as they somehow think the economy will grow at six to seven per cent — despite increasing debt, rising taxes, public expenditure cuts and most private sector CEOs expecting profits to grow by a maximum two per cent.

We will be lucky to collect Sh1.5 trillion this fiscal year — meaning we must borrow the Sh400 billion shortfall, making the stated 5.8 per cent budget deficit fake news. The actual deficit is, thus, eight to nine per cent.

A lower deficit will reduce the cost of debt servicing. The refinance risk the government is carrying with a huge holding of Treasury bills could potentially allow it to roll over the domestic debt much cheaper if it reduced its borrowing.

A 200 basis points saving on the Sh2.6 trillion domestic debt could save it Sh52 billion in interest — double the Sh17.5 billion the unpopular fuel VAT would bring in — and stimulate credit to the private sector.

For the foreign debt, the best strategy to reduce the interest bill and create fiscal space would have been to stay with the IMF.

The fuel VAT is a symptom of a bigger problem that, if not managed well, will bring the house down.

You cannot have five consecutive years of more than eight percent fiscal deficit and not experience a debt crisis. This is the problem MPs should be tackling, not VAT.

Mr Wehliye is a senior adviser to the Saudi Arabian Monetary Authority. [email protected]

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