Why government didn’t convert Sh537bn pending bills into bond

The government shelved a plan to convert pending bills into a bond following concerns it would significantly increase the pile of debt at a time the country’s position has been classified as being at high risk of debt distress.

Securitisation of pending bills would imply the government floats a bond to offset the backlog of arrears, a proposal that was touted by Kenya Kwanza in the run-up to the August 2022 general election.

A Treasury official has told Newszetu that concerns over what this would mean given the potential size of issuance as well as minimal headroom from the prescribed debt ceiling of Sh10 trillion prompted the change of tack.

According to data from the Central Bank of Kenya (CBK), the stock of public debt closed in March 2023 at Sh9.4 trillion, just Sh600 billion shy of the prescribed ceiling under the Public Finance Management Act.

On Thursday last week, the Treasury backpedalled on the intended securitisation, calling for the establishment of a verification committee to advise on how best to settle the load of arrears the State is grappling with.

“Management of pending bills is a challenge. The delay in settling payments of pending bills has led to the deterioration of the financial position of businesses, in particular micro, small and medium-sized businesses,” Njuguna Ndung’u, the Treasury Cabinet Secretary, told the National Assembly.

“… the National Treasury has prepared a Cabinet memo requesting the Cabinet to approve the establishment of a pending bills verification committee to carry out a thorough analysis of all pending bills and advise on how the bills will be settled.”

In its election manifesto, Kenya Kwanza pledged to securitise pending bills, a move that would see the government float a bond to retire the arrears that have inflicted grave cash flow constraints on businesses across the country.

“The total outstanding national pending bills as of March 31, 2023, amounted to Sh537.2 billion comprising of Sh450 billion for State corporations, semi-autonomous government agencies and Sh79.3 billion for Ministries, Departments and Agencies. During the same reporting period, the county governments reported pending bills of Sh159.7 billion,” said Prof Ndung’u.

The IMF says Kenya is at high risk of debt distress. “Kenya’s debt is sustainable but overall and external ratings for risk of debt distress remain high. Under the baseline, public debt is expected to peak at 67.6 percent of GDP in FY2022/23. Debt dynamics will be bolstered by fiscal consolidation under the program, bringing debt to more prudent levels over the medium term”, the IMF stated in its fourth review report in December 2022.

The Treasury’s shift comes at a time the CBK has warned the domestic market may not have the capacity to meet the financing targets set by the Treasury for the financial year 2023/24.

“The domestic market has continued to support growing budgetary financing requirements. However, due to elevated financing needs, the capacity of the domestic market to finance deficits, especially in the last two financial years has been limited,” CBK says.

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