MPs back calls for creation of sinking fund to pay debt
Friday March 03 2023
MPs have backed calls by the Controller of Budget (CoB) to create a special fund for debt servicing to avert debt distress.
The parliamentary Committee on Public Debt and Privatisation has given the Treasury up to July to table regulations to guide the creation of a sinking fund in a bid to ease pressure on the Exchequer.
Kenya is grappling with a high expenditure to pay Chinese loans piling pressure on the ordinary revenue collections, which prompted CoB Margaret Nyakango to push for the fund.
Read: Budget boss eyes special fund for debt repayment
Dr Nyakango warned that Kenya risks slumping into debt distress because of the pressure on the Exchequer to pay matured loans.
“The National Treasury should within six months table regulations for the establishment of a sinking fund dedicated to public debt servicing as provided for under section 50 (8) of the PFM Act 2012,” the committee says in recommendations to the House.
“This is to enable the buildup of savings to meet rising and costly public debt repayment and ease the debt repayment profile.”
A sinking fund refers to money set aside for a specific purpose over time. Governments mainly use them to repay a debt to avoid piling pressure on critical expenditures.
Kenya pays public debt from the Consolidated Fund Services (CFS), which also covers other obligatory payments like salaries and pensions, which has left the Exchequer exposed.
“A sinking fund would help the country to gradually save money and avoid large lump-sum payments at maturity. Kenya is gradually moving towards breaching sustainability thresholds,” Dr Nyakango warned in December.
Payment of external public debt accounts for the biggest expenditure per single budget item in the CFS, at 88 percent according to the Treasury documents tabled in Parliament.
Kenya’s stock of public debt stood at Sh9.15 trillion as of December last year, with external loans accounting for 51 percent or Sh4.67 trillion.
Kenya’s public debt woes have been compounded by the weakening shilling that made dollar-denominated loans costlier, prompting the Treasury to increase allocations meant for debt servicing.
Public debt is projected to hit Sh9.413 trillion by June prompting a move by the William Ruto administration to push for a change in the debt ceiling.
Kenya’s debt ceiling is capped at an absolute figure of Sh10 trillion but Cabinet on Tuesday gave MPs the nod to set it at 55 percent of the gross domestic product (GDP) in present value terms.
The Cabinet said that the shift is aligned with the global best standards and ensures the sustainability of the mounting public debt.
Read: Parliament rejects fund for payment of public debt
MPs in 2021 shot down a push by the Treasury to create a sinking fund, on grounds that regulations published lacked the input of Kenyans.