Kenya’s public debt has grown 14 per cent since January from Ksh5.3 trillion to hit Ksh6 Trillion leaving analysts concerned about debt sustainability. For instance, there is a concern about increasing government appetite for external funding which within a year has increased by 20 per cent from Ksh2.6 trillion in 2018 to 3.16 trillion by August 2019.
In its latest Regional Economic Outlook – Sub-Saharan Africa, the IMF shows that arrears accumulation is due to weak public financial management (PFM) systems and weak fiscal institutions.
Domestic arrears were found to weaken private sector activity and undermine financial stability. In addition, arrears reduce the ability of fiscal policy to support the economy, by reducing the multiplier effect of government spending.
Furthermore, making the interest and principal repayments in a foreign currency threatens to deplete foreign exchange reserve. this may lead to inflationary pressure as Kenya imports more goods and services than it exports.
Beyond economic ramifications, the IMF says that arrears weaken government credibility, as public institutions are considered less trustworthy, more prone to corruption, and less capable of delivering public policy.
In Kenya’s case, public debt represents 60 per cent of GDP up from 42.8 per cent in 2008. The government needs to change tact in funding infrastructure and social projects.
An ideal solution would be a sub-national debt market to augment financial gaps and infrastructure funding for counties and urban centres.
Lessons From India
In the mid-90s, India undertook reforms to develop a functioning municipal bonds market.
Municipal bonds issued by Urban Local Bodies (ULBs) in India are structured debt obligations, issued by pledging certain sources of revenue.
With a growing urban population, Indian cities needed alternative financing models to achieve the magnitude of infrastructural investment required.
In 1998, Ahmedabad Municipal Corporation successfully issued the first Municipal bond in India without state guarantee setting precedence towards a market-based system of local government finance.
The government of India issued guidelines for issuance of tax-free Municipal bonds in February 2001 – stipulating eligible issuers, use of funds, compulsory credit rating, external monitoring, maturity period, and nature of the issue.
Proceeds from municipal bonds were used for the supply of portable water, sewerage or sanitation, drainage, solid waste management, road, bridges and flyovers, and urban transport.
On top of that, small and medium ULB pooled their resources and jointly accessed capital markets to issue municipal bonds.
For instance, in 2003, the Tamil Nadu Urban Development Fund issued a bond by pooling 14 Municipalities for commercially viable water and sewerage infrastructure projects.
Opportunity for Kenya’s Capital Markets
Capital Markets Authority (CMA) believes that Kenya can utilise specific capital markets products to support sub-national development projects.
In Soundness Report – Q3.2019 CMA notes that an opportunity abounds for the Capital Markets to facilitate the structuring of financial models to facilitate investment in new asset classes that support infrastructure development amongst the Kenyan Cities and urban areas.
Learning from the huge success of Municipal bond issues in India, the support of the Government of Kenya is key in supporting similar issuances in Counties either as stand-alone or pooled or in the form of revenue bonds and/ or General Obligations Bonds. Further, the GoK10should emulate reforms taken by India such as exemption of such bonds from withholding tax on interest income.
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