Start honest economy debate

Treasury Cabinet Secretary Prof Njuguna Ndung’u with the Principal Secretary Dr Chris Kiptoo. FILE PHOTO | NMG

Confidence in the future starts with honesty today. Until the other day, the narrative from the Treasury was that our public debt levels were sustainable. Even when all the evidence was that public finances were in the deep red, the standard refrain was that we did not have a serious debt problem.

It is reality check time as the chickens come home to roost. Is it not the height of ivory that the government is finding it difficult to meet a commitment as basic as paying civil servants?

The Treasury is unable to promptly release the share of national revenue that must go to county governments as stipulated by the Constitution.

The Higher Education Loans Board faces collapse. Public universities are grappling with widespread financial distress. Indeed, there is a real risk that the country may plunge into widespread industrial disputes and strikes.

With the debt service bill in the fiscal year ending June 2023 now at Sh1.3 trillion, and in the context of crippling revenue shortfalls and rising expenditures, we are clearly facing a debt snowball situation, finding ourselves in a situation where we have to service debt by taking more debt and paying interest on interest.

Worse, we don’t have clean numbers and statistics to give the full picture of debt levels. Because of the anachronistic accounting system the government runs, we don’t regularly revalue our external debt obligations into shillings. We don’t book unrealised losses on a real time basis.

Clear and comprehensive details about outstanding disbursements on loan commitments, the level of pending bills at both the national and county governments and contingent liabilities from murky debts and external loan guarantees to parastatals are hard to come by.

The biggest elephant in the room is pending bills accumulated by the national and county governments.

Our problems are compounded by yet another basic conundrum. We have major credibility issues with the numbers and accurate statistics on the size of the fiscal deficit.

We start by exaggerating GDP growth forecasts and numbers that lead to exaggerated revenue forecasts and targets.

This is why we end up with the ironic and contradictory situation where you frequently find the Treasury on the one hand whining loudly about crippling revenue shortfalls while the Kenya Revenue Authority is touting 95 percent performance on its revenue targets.

Exaggerated GDP numbers and projections course us to unsustainable budget deficits targets and on to spending plans we are incapable of funding.

What both Parliament and the Treasury need urgently is a dose of honesty. When you approve a budget with a gaping hole of Sh800 billion, you must be prepared to face the consequences of excessive borrowing. None lives beyond their means forever.

The most poignant lesson we must learn from recent activities and trends in the Treasury securities auctions is that honesty on numbers and statistics about the present begets confidence in the future.

In the most recent auction, we saw the market subscribing only to Sh3.5 billion when what was on offer was Sh20 billion. This, despite the fact that the government was accepting bids as high as 14 percent.

Clearly, the markets are only willing to lend to the government on a long-term basis because they are already factoring in a default or the likelihood of forced haircuts in the image of what Ghana did in December.

In plain terms, the markets are saying: “We will not lend to you at 14 percent for 10 years. We are safer lending to you at eight percent for 90 days”.

But why would a rational investor want less for his savings? It is because he believes that beyond 90 days, there may be forced haircuts or bond switches. In November last year, we saw the Central Bank of Kenya(CBK) coming out to effect what ranked as the second bond switch in the history of the market for government securities in Kenya.

The first was affected in June. To me, what was remarkable was the rare transparency and full disclosure by the CBK to markets. ‘I have maturities coming due in January 2023 which I can’t pay’.

We need a grown-up discussion on options out of the public debt problem and the practical steps to revive the economy.

If you asked me one of the biggest causes of our economic problems in the last ten years, I would name the subdued and inadequate levels of corporate investment as the root cause of the paradox where we post relatively good GDP growth numbers when we can’t meet revenue targets.

We have had jobless growth.