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IMF, World Bank raise the red flag over Kenya’s debt

Kenya must put a tight lid on its debt load to keep its economy on a steady growth path, the International Monetary Fund (IMF) and the World Bank have warned in a note to key organs that determine their lending to member states.

East Africa’s largest economy risks rapid debt escalation when planned borrowing for the mega projects in the pipeline are taken into account, raising the red flag for the very first time on the dangers to growth that is looming from Jubilee government’s leveraged infrastructure development plan.

IMF managing director Christine Lagarde. The IMF-WB joint note proposes that Kenya finds new mechanisms of funding its huge infrastructure projects. FILE  AFP

IMF managing director Christine Lagarde. The IMF-WB joint note proposes that Kenya finds new mechanisms of funding its huge infrastructure projects. FILE AFP

“A more detailed discussion of the costing of programmes and projects envisaged under the second medium-term plan (MTP-2) would be warranted in order to better assess their potential impact on debt sustainability,” the lenders say.

The IMF-WB joint note proposes that Kenya finds new mechanisms of funding its huge infrastructure projects that is devoid of debt as envisaged by the MTP-2.

It recommends that Kenya should explore innovative funding mechanisms, including public-private partnerships and assesses how any new programmes and projects will be incorporated into the government’s medium-term expenditure framework.

“Macroeconomic policies should cement recent successes by [among other things] aiming at gradually lowering the public debt-to-GDP ratio while raising infrastructure investment,” the Bretton Woods institutions say in a memo that was circulated to their executive boards early this week.

The executive boards are the decision-making organs that offer or deny credit to IMF and World Bank member countries.

Kenya has committed to borrowing billions of shillings to finance mega public infrastructure projects including the building of a standard gauge railway line between the port city of Mombasa and the capital Nairobi.

The country has also borrowed billions of shillings to finance power generation and road construction. It is estimated that these borrowings could soon take the debt load past 60 per cent of GDP.

READ: Treasury projects public debt load of Sh2.2trn by June

Borrowing plans should remain anchored on the government’s medium-term debt management strategy, the report says suggesting that the debt ratio be kept at not more than 50 per cent of the GDP.

Kenya’s debt load crossed the 50 per cent of GDP mark late last year to stand at Sh2.11 trillion or 57 per cent of GDP by end of December 2013.

And in what appears to have informed President Uhuru Kenyatta’s recent drive to cut the public wage bill, the Bretton Woods lenders say management of government’s expenditure on salaries and allowances will be key to securing resources for development in the medium term.

The memo on the state of Kenyan economy singles out recent increases in the salaries and allowances of MPs, members of county assembly, lecturers and teachers as a having contributed to a steep rise in the wage bill’s share of national and county spending.

Fiscal discipline will break down and disrupt provision of public services if the wage bill growth is left unchecked, the memo warns.

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