Enhancing Debt Transparency in light of Kenya’s increasing investment in capital projects

Background

The Government of Kenya continues to invest in capital projects. These capital projects require huge amounts of financing. They are usually financed through debt. In Kenya’s case, the huge debts continue to raise concerns from various stakeholders and the public in general.

In November, 2020 the Member of Parliament for Nambale Constituency, Hon. Sakwa J. Bunyasi, presented in Parliament the Public Debt Management Authority Bill, 2020. According to Hon. Sakwa, the intention of the bill is “to enforce better scrutiny of projects before they enter the budget system, streamline borrowing and management of debt and have expertise to advise whether the borrowing is consistent with the ability to repay.” The Bill still sits in Parliament.

In April,2021 there was a public outcry over government’s growing appetite for debt in the wake of USD 2.34 billion from the International Monetary Fund (IMF). Kenyans online started a petition to the IMF to cancel the said loan to Kenya.

In February, 2021 when public debt was fast approaching statutory ceiling of KES 9 trillion, there was a push to raise the same above KES 9 trillion.?In the latest move, the state has reignited the push to raise the debt ceiling via a 2022/23 Budget Policy Statement from the current KES 9 trillion with the new cap still undisclosed.

From this series of events, one thing sticks. It is the ballooning public debt in Kenya and the lack of transparency enshrouding the same.

What is debt transparency

Transparency simply denotes “doing things in the right way.” When it comes to debt, it means more than that. The term "debt transparency" refers to the full public disclosure of information concerning government and public debt. The information disclosed should be clear, complete, trustworthy, frequent, and timely. It must include not only the national government's debt commitments, but also those of state state-owned firms and county governments. Contingent obligations of the government, particularly loan guarantees, must also be adequately stated. Simply put, it is how much is owed, to who and under what terms.

Debt transparency is crucial as it helps make well-informed borrowing decisions. Policymakers in borrowing countries require accurate debt data. Creditors, donors, analysts, and rating agencies all rely on it to evaluate sovereign creditworthiness and price debt instruments appropriately. It is also required by citizens to hold governments accountable. The necessity for a complete and transparent accounting of public sector borrowing is becoming increasingly urgent as debt levels in low-income nations rise.

Disturbing statistics on debt transparency in developing economies

The World Bank and IMF have over the past few years raised concerns over debt transparency, particularly in developing economies. Due to the secrecy surrounding the quantity and terms of debt repayment, some countries have been pushed to make significant concessions or hand over control of their resources to creditors, particularly China. In November 2021, the WBG released a report on Debt Transparency in Developing Countries. This report highlights some disturbing statistics:

a)????40% of low-income countries have not published any sovereign debt data in the last two years preceding the report;

b)????public debt data when reconciled have sometime shown huge discrepancy of up to 30% of the GDP;

c)?????15% of low-income countries have collateralised debt but no details of terms are public; and

d)????12 countries are in debt distress and 44 in the risk of it.

Signs of lack of debt transparency in Kenya

In the recent weeks, there has been public display of lack of transparency as to the debts owed by Kenya. First, the Members of Parliament including those who have been part of the Budget and Appropriations Committee of Parliament cannot agree on how much is owed. One wonders whether they would agree on who is owed and under what terms.

Secondly, the team behind the current push to raise the debt ceiling have not disclosed what the targeted cap shall be. This has been left to speculation with undisclosed sources indicating that the ceiling is to be raised from the current KES 9 trillion to KES 13 trillion.

Who bears the responsibility on transparency and the role of government

There are three main categories of parties bearing the debt transparency obligation. They include the sovereign government, state corporations and sub-national governments (the Government), lenders and International financial institutions. The subject of debt transparency is as important to the private sector as it is to the other players. This is because private sector players have an obligation of transparency to their shareholders, investors and other stakeholders. The government should publicize the core public debt and publicly guaranteed debt statistics. It should also limit and define confidentiality clauses in debt contracts.

Benefits debt transparency to a country

Facilitates sound lending practices

In order for creditors, investors, and credit rating agencies to assess a country's creditworthiness, its ability to service its debt commitments, and any hazards that might jeopardize that ability, sound lending processes must be made easier. This helps to ensure the long-term viability of government debt. Comprehensive information on public debt allows market participants to better price government securities and avoid risk premia they can attach to these instruments to mitigate risk. This has proven to be a factor in lowering borrowing costs in the medium to long run.

Ensures effective risk assessment and the development of long-term borrowing and lending policies

Greater debt transparency allows borrowers and lenders to assess the long-term viability of government debt and keep track of developing threats. Recent examples of hidden debt show how debtors might suffer negative social, economic, and political consequences. The G20 has recently asked the IMF and the World Bank to prepare two notes:

a)????supporting borrower countries' capacity building in public debt recording, monitoring, and reporting; and

b)????enhancing the role of the IMF and the World Bank in strengthening public debt transparency, including through debt data collection and dissemination, public debt analysis, and their support for sustainable lending.

Debt transparency act as a deterrent against corruption and fraud

The ability of civil society to hold governments responsible is made possible by debt disclosure. Government borrowing decisions and debt management techniques can be scrutinised more closely by an informed civil society. Furthermore, debt transparency can serve as a disincentive to corruption and fraud. The more comprehensive and detailed the data, the more probable it is that wrongdoing will be uncovered.

Encourages investment from potential lenders

Debt transparency allows potential lenders to better analyse the risks of investing in bonds issued by certain governments. Uncertainty about a country's obligations, on the other hand, causes lenders to raise borrowing costs or refrain from investing altogether.

Ensuring sound borrowing decisions

The borrower's role is to ensure that correct and timely public debt records are kept, that debt and borrowing activities of off-budget companies and contingent liabilities are rigorously monitored, and that public debt reports and data are made available on a regular basis. Data on the size and composition of debt for the entire public sector, not just central government, is required to establish the structure of new borrowings in order to effectively manage portfolio risks and avoid incurring high borrowing costs. The requirement for debt disclosure is especially more crucial in the contemporary global environment. Governments must have a firm grasp on their debt levels. The President of the World Bank in supporting this statement observed as follows:

“Transparency is vital in our work to improve development outcomes because it attracts more investment and allows for more effective capital allocation. The precise and comprehensive information on debt levels, as well as its composition, is more important than ever."

Debt transparency is critical for the international financial community, particularly the international financial institutions, who are tasked with preventing or intervening in governmental debt problems and resolving them. Comprehensive public debt data is critical for conducting debt sustainability analyses and providing the technical and financial support required to keep macroeconomic stability.

Best debt transparency practices for developing countries

a)????Create a legal framework for public borrowing - it is advisable to have an outlined legislation which cover all the debt incurred from private and public sources. It should mainly include the objectives, strategies and processes of public debt management which should be accessible to all citizens;

b)????Conduct and publish Debt Sustainability Analysis (DSAs) therefore assessing and managing debt vulnerabilities and minimizing debt distress accordingly;

c)?????Instituting Integrated debt recording and management systems that align with international standards, for example, using the Medium-term Debt Management Strategy (MTDS);

d)????Publish all public guaranteed debt and statistics annually. They should include the composition of the debt, the analysis of the risks involved and the constraints that the country may face;

e)????Encourage coordinated data collection and disclosure among creditors together with borrowers;

f)??????Provision of a performance Management Framework. The government should provide an updated performance management framework for monitoring of the funds.

g)????Limit and define?the scope of confidentiality clauses in borrowing, and refrain from those that require secrecy.

The importance of debt transparency cannot be over-emphasised. It the gateway to getting better terms, attract quality debtors. It also helps debt decisions to be consistent with the ability of the state to repay. Without it, creditors put a premium rate on the uncertainty. The government should at all costs improve debt transparency. Lastly, comprehensive reporting of debt to make citizens, policy makers lenders have a clear understanding on countries vulnerability.

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