Post date: Tue, Sep 18, 2018 | | Category: Debt | |
This is part two of #NOW following last week’s in which we examined the trends in the domestic and external public debt in Kenya. In this article we further focus on the public debt by looking at its share composition: Domestic versus External Proportions over time. We aim to answer the question, “Is the government borrowing heavily from external sources or internal sources?” The blog is informed by the understanding that it is not only the stock of debt but also its composition in terms of external sources and internal sources that comprise policy alternatives in debt management and have salient economic implications on Kenya’s economic progress.
Since the debt crisis of the 1980’s, debates on the impact of external debt on the economic growth has raged on. Two main arguments put forward by scholars are that external borrowing would result in (i) debt overhang effect and (ii) Increased exposure to external shocks. The empirical studies reveal that increased in the stock of external debt signals the high likelihood of increased taxes by the government in order to service the debt, thus discouraging private investment – a situation known among economists as debt overhang effect. On the other hand, researchers also find that increased external debt can potentially lead to diminished foreign reserves in a situation where the receipts from exports are used to service the external debt since payment is done in US dollars – a situation that often leads to reduced foreign reserves that are important in cushioning the economy against external shocks. Such economic shock may comprise weakened domestic currency, oil crisis and global economic slowdown.
Source: Central bank of Kenya
The chart above illustrates trends in the proportion of external debt to internal debt from September 1999 to 2018 March. Across the period, debt management policies (external versus internal debt sources) can be examined across the three regimes of government: from President Moi’s regime, Kibaki’s and Uhuru’s regime. This enables us to evaluate the regime that has affinity to source the public debt from external sources.
As at March 2018, the total stock of debt in Kenya amounted to Ksh 4.9 trillion, comprising Ksh 2.37 trillion domestic and Ksh 2.51 trillion external debt, working out to 51.4% external debt and 48.6% internal debt.
Number of the Week: 51.4%
This implies that, considering the share of external debt that the two regimes inherited, Kibaki regime worked to lower the ratio by favouring internal borrowing while Uhuru regime has increased the ratio of the by favouring high borrowing from external sources.
At the current state of the economy in which Kenya imports more than it exports with a merchandise trade deficit of Ksh 1.13 trillion up from in 2017 to Ksh 853.7 billion in 2016 , it implies there is high demand for the dollar in the international market compared to the shilling. Continued borrowing of the external debt could result in a further weakened Kenya’s currency and imported inflation due to short run adjustment of the economy to a steady rise in the importation over exports, thus affecting the cost of living.
In the advent of increased Non-Communicable Diseases such as cancer that require long time treatment, reduction of the Out-of-pocket payments is key in sustaining affordability and access to health care services. These can be achieved through increased insurance both by the government and the private sector.
Treasury bonds are a secure, medium- to long-term investment tools that typically offer periodic interest payments semiannually throughout the bond’s life. The Central Bank auctions Treasury bonds on a monthly basis, but offers a variety of bonds throughout the year, so prospective investors should regularly check for upcoming auctions. Outstanding Treasury Bonds increased by 11.2 per cent to Ksh 1,152,041 million in June 2016 from Ksh 1,035,662 million in June 2015.
In June 2016 compared to June 2015, the stock of Treasury bills increased by 84.4 per cent to Ksh 588,088 million from Ksh 318,929 million while the proportion held by commercial banks increased by 67.4 per cent to Ksh 361,859 million from Ksh 217,742 million. In the same period, holdings by pension fund institutions increased to 20.1 per cent from 12.8 per cent while proportion held by insurance companies decreased to 3.1 per cent from 6.5 per cent.
The medium term debt strategy for the financial year 2016/17 emphasized on the need to develop the domestic market by increasing the issuance of Treasury bonds over the medium term. The strategy targeted a mix of 60 percent and 40 per cent for external and domestic financing, respectively.
Trends in Kenya’s Total Domestic Public Debt Stock from 1999 – 2018 (In nominal terms) Source: Central Bank of Kenya The number of the Week: 2.1, this is the factor by which domestic debt has grown in the last five years. Domestic debt has nearly doubled in the last five years (2013-2018) Between 1999 and […]