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Home News Kenya faces debt trap on yielding to IMF demands

Kenya faces debt trap on yielding to IMF demands

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The intense pressure by International Monetary Fund (IMF) which saw National Treasury cave in to include county government and parastatal debts onto the national debt has opened a pandora’s box, with far-reaching ramifications on Kenya’s sustainability effort.

The Bretton Woods Institution wants Treasury to take responsibility for both guaranteed and non-guaranteed debt.

The IMF reports says the government has guaranteed Sh139 billion which includes the Sh75 billion given to struggling Kenya Airways it wants to nationalise.

Under this arrangement, Treasury may find itself paying debts on behalf of parastatals such as Kenya Airways and Kenya Power even as Central Bank of Kenya (CBK) warned that State-owned enterprises may default on Sh100 billion borrowed from 35 banks in its financial sector stability report.

Treasury estimates that county debt and debt from State-owned enterprises totals Sh3.4 trillion, which is nearly twice Kenya’s public debt, when former President Mwai Kibaki was leaving office.

Analysts say that Treasury will have no option but to pay since all parastatal and county debt must be approved by Treasury before it is borrowed.

“They feel that the parastatals themselves may not be able to pay. Many of the funds were borrowed for national projects.

That is why they are not allowed to borrow on their own without approval from the National Treasury,” said University of Nairobi Economics lecturers Gerishon Ikiara.

This means the debt owned by struggling corporations like Kenya Power, Kenya Airways, Postal Corporation of Kenya and many more could complicate Treasury’s efforts to climb out of the slimy hole.

Independent analysts Aly Khan Satchu says the hand of IMF can now be seen everywhere making all kinds of decisions for the Treasury.

He adds that the multilateral lender was behind the debt relief programme and now has arm-twisted Treasury to accept county and parastatal debt.

“The IMF is now very much in the driving seat and the can which was being kicked down the road has now run out of the road,” said Aly Khan.

Kenya Power had applied to be given tax waivers by the Treasury raising concerns on the level of its financial distress having pushed through a tariff increase a few weeks back.

Stability Report

In the Financial Sector Stability Report, CBK said State-owned Enterprises (SOEs) in the agriculture sector were able to service their loans, but those in the transport, trade and manufacturing sectors, have either delayed or stopped making payments.

The Controller of Budget Margaret Nyakang’o, however, notes that according to the Public Finance Management Act, Parliament is supposed to debate and approve before it can be added on the public debt.

She said there has to be a way of vetting which kind of debt can be lumped on to the national debt.

“Most of this debt was taken as corporate debt, so my view is we need approval from Parliament to add it to public debt,” said Nyakang’o.

Nyakango said that the six-month debt waiver shows that we were nearly defaulting.

“The IMF is now saying it is a must for Kenya to disclose the debt that was not being reported before, because otherwise we were just dealing with national debt,” she said.

This means that public debt will increase from the current Sh7 trillion to way over Sh10 trillion which is above the current debt ceiling and near the Sh12 trillion proposed new debt ceiling.

“The authorities noted the importance of expanding debt coverage to include counties, non-guaranteed debt contracted by the extra budgetary units, and State owned Enterprises.

  They planned to take a gradual approach to monitoring contingent liabilities, for example, to start to monitor external borrowing by large SOEs,” the IMF said in the latest review on Kenya’s debt.

In summary

    • Under this arrangement, Treasury may find itself paying debt on behalf of parastatals such as Kenya Airways and Kenya Power.
    • State-owned Enterprises in agriculture sector were able to service loans, but those in the transport, trade and manufacturing sectors, have either delayed or stopped making payments.
    • The Controller of Budget Margaret Nyakang’o, notes that according to Public Finance Management Act, Parliament is supposed to debate and approve before it can be added on the public debt.
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