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

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? • 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or external • PFM Act , 2012 - relevant legislation with regard to public finance management; • The Act repealed the External Loans & Credit Act, Internal Loans Act & the National Government Loans Guarantee Act- These provided a legal framework for Government to raise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

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

6. 2. Kenya’s public debt: 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 Credibility . Professionalism . AccountAbility

7. ..but debt to GDP ratio has declined and remains relatively stable • Prudent fiscal management and modest fiscal deficits helped safeguard Kenya’s debt position. 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.

8. Current Public Debt Situation-Kenya- Ksh Million Credibility . Professionalism . AccountAbility

9. TOTAL EXTERNAL DEBT- KSH. MILLIONS Credibility . Professionalism . AccountAbility

10. EXTERNAL DEBT BY MAJOR CREDITORS Credibility . Professionalism . AccountAbility

11. External debt is highly concessional • 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% • Credibility . Professionalism . AccountAbility

12. 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 • Credibility . Professionalism . AccountAbility

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

14. AFRICA’SDEBTSITUATIONPOST-DEBTRELIEF: FALLINGEXTERNALDEBTRATIOS • 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 Credibility . Professionalism . AccountAbility

15. OVERALL PUBLIC DEBT & DEBT SUSTAINABILITY IN KENYA • 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 . Credibility . Professionalism . AccountAbility

16. WHY DEBT MANAGEMENT IS IMPORTANT • 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: • undermine investor sentiment and spark financial instability • 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 Credibility . Professionalism . AccountAbility

17. 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. • Credibility . Professionalism . AccountAbility

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