November 15, 2019 / 11:35 AM / 24 days ago

FACTBOX-Debt-laden Kenya draws up new policy to curb its borrowing

NAIROBI, Nov 15 (Reuters) - Kenya’s finance ministry wants to manage the public debt better by officially coordinating its borrowing plans with the central bank, the government said in a draft debt policy published for public comment this week.

The East African nation wants to avoid borrowing from capital markets abroad using instruments such as dollar bonds, after a binge of borrowing in recent years including Eurobond offerings, a package of Chinese loans and syndicated commercial loans.

The public debt has climbed to just above 62% of GDP, or 6 trillion shillings ($59 billion), forcing parliament to raise the debt ceiling last week.

Here are some key facts about Kenya’s debt and the new draft policy:

* The government breached the previous legal debt ceiling of 50% of GDP in the 2015/16 financial year, but no action was taken. The infringement only came to light recently when a new team took over at the Treasury.

* The new team moved to raise the debt ceiling, after the previous finance minister was charged with graft-related offences in July.

* Last week, parliament approved scrap the debt ceiling pegged to GDP, and instead set the ceiling at 9 trillion shillings, which the government forecasts will be hit in 2024.

* Officials want to pay off their expensive borrowing from capital markets and instead seek loans from overseas development institutions such as the World Bank, which offers cheaper interest rates and longer repayment periods.

* Kenya has not previously had an explicit debt and borrowing policy. Previously, the finance minister has made decisions about borrowing, and parliament has rarely challenged those plans.

* Under the draft policy, the Treasury would coordinate its borrowing with the central bank, and this coordination would be set down in law.

* Central bank governor Patrick Njoroge has blamed the ultra-loose fiscal stance of the Treasury, compared with the cautious stance of the central bank, for reducing the central bank’s flexibility in setting interest rates.

* The draft policy proposes regular stress tests of the government’s debt portfolio to assess the potential impact on it of potential shocks from fluctuating exchange or interest rates.

* The policy also proposes the formation of a government securities auction committee to review and approve auction results.

* It prohibits the use of capital market borrowing to finance social projects, arguing that the rate of return for projects must be high enough to justify taking on such debt.

* Under the new policy, the government will be required to regularly publish data on the debt portfolio, including new metrics like debt servicing to GDP ratio and interest payments to GDP.

* If the government cuts down on capital market borrowing, that could boost credit for local businesses, which have suffered a credit squeeze due to a government-imposed rate cap and the extent of government borrowing.

* Once the public has submitted suggestions, the Treasury will finalise the debt policy and send it to parliament so it can be built into the laws and regulations governing public finance management. Legal experts say that process could take a year or more. ($1 = 102.3500 Kenyan shillings) (Editing by Katharine Houreld and Hugh Lawson)

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