Inside Politics

Why Kenya must focus on reduction of budget deficit

Wednesday, April 14th, 2021 00:00 |
The National Treasury building. Photo/PD/Alice Mburu

Lewis Njoka @LewisNjoka

Kenya needs to focus on reducing budget deficit to deal with the ballooning public debt, experts have said.

This comes even as reports indicate Parliament has plans to lift the public debt ceiling from the current Sh9 trillion to between Sh11 trillion and Sh15 trillion.  

As of February, the total disbursed and undisbursed public debt stood at Sh8.58 trillion according to the Director General of Treasury’s Public Debt Management Office, Haron Sirma.

Mohammed Wehliye, an economist and a senior advisor at the Saudi Arabian Monetary Authority, said having a debt ceiling will only make it difficult for the government to borrow in future yet it is clear the country cannot meet its budgetary obligations without debt.

“You don’t control debt by using limits and ceilings. Because at the end of the day, as we have seen, they don’t make sense and if they are there to be broken why do you have that speed limit?

Putting controls

“You control debt through the deficit. In my view, the better approach to managing debt and putting controls on it is in Parliament or even in Treasury by having a limit on the deficit itself,” he added.

If the country limited its budget deficit to say, four per cent of the gross domestic product (GDP), it would have a better effect than using a debt ceiling, according to Wehliye. 

Nikhil Hira, an economist at Bowmna’s Capital said by cutting on expenditure the government would reduce the budget deficit, hence, the government wouldn’t need to borrow as much.

“What we should be doing is saying, look, we have too much expenditure, let’s cap that,” he said.

He, however, noted that cutting expenditure would be an unpopular decision with politicians, especially those planning to ride on government development projects to seek re-election.

Samuel Nyandemo, a senior economics lecturer at the University of Nairobi, however, defended the use of debt ceiling, saying it was more viable than having a cap on budget deficit considering that deficit financing was a common instrument for development in developing countries.

“It can be an effective tool if the legislators know what is required of them. If this thing is passed in Parliament and becomes law, it would be an effective tool,” he said.

Such a law, according to Nyandemo, would allow Parliament to even impeach a President if he breached the debt ceiling.

Recently, Kenyans began an online petition asking the International Monetary Fund (IMF) to stop giving the country more loans, saying that the monies were being misappropriated. 

This followed a decision by the Bretton Woods institution to approve a Sh255 billion loan to Kenya meant to support the country’s Covid-19 response and reduce its debt vulnerability.

IMF programme

ANC Party leader and a former finance minister, Musalia Mudavadi, however, warned that while Kenyans had a legitimate reason to protest the alleged misuse of loans, it would be counterproductive for the IMF to opt out of the country.  

“I would not support a situation where the IMF walks out on Kenya. It will be very painful, it will be difficult,” he said.

 “At the end of it all, bearing in mind that we are suffering from the ravages of Covid-19 and our earnings as a country have shrunk, it will be very dangerous not to have an IMF programme,” he added.

He said under the current economic circumstances, Kenya engaging with the IMF was both important and necessary as the country had limited options to borrow.

Public debt Management Bill 2020, currently in Parliament, seeks to place the management of public debt under a semi-autonomous authority. 

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