IMF-backed law now sets borrowing by the government at about 55% of the country’s GDP, away from the current numerical Sh10 trillion public debt ceiling.
The government will now be compelled to borrow loans equivalent to not more than half of the country’s Gross Domestic Product after President William Ruto enacted a law that seeks to help manage and regulate the country’s public debt.
Popularly known as the “debt-anchor Bill”, the new law now sets borrowing by the government at about 55% of the country’s GDP, away from the current numerical Sh10 trillion public debt ceiling.
As such, the new law – in line with a promise made to the International Monetary Fund (IMF) by the previous administration – is crucial in providing the framework for sustainable debt management.
The Bill, which President Ruto approved on Friday, sets the borrowing threshold at 55% of GDP in present value terms. This is a departure from the current numerical debt ceiling with a percentage of debt to the GDP.
The National Assembly first passed the new law and sent it to the Senate, which passed it with amendments. The National Assembly rejected the amendments made by the Senate, and the Bill was accordingly referred to a mediation committee.
The mediated version of the Bill was considered and passed by the two Houses of Parliament on 12 October 2023.
The enactment of the Bill means that the Government may now exceed the threshold — by not more than five per cent — in extreme economic circumstances.
The Bill, sponsored by the Leader of the Majority Party, Kimani Ichung’wah, defines public debt by including the principal, interest payments and all financial obligations attendant to the issuing of loans by the Government.
This aligns public debt with the provisions of the Constitution, especially Article 214.
Ichung’wah noted that the Bill paves the way for the government to manage its debt without hurting growth.
This will be done by requiring the cabinet secretary for Treasury to take measures to ensure that within five years of the date of enactment of the Bill, public debt is reduced to sustainable levels in line with the set debt threshold.
This move aims to protect the country from sudden reduction of critical social spending, food security and poverty reduction. It will also protect infrastructure spending to preserve Kenya’s long-term development and economic prospects.
In a move to guarantee debt remains below the set threshold, the Bill provides that the Cabinet Secretary for Treasury will submit a report on any breach of the debt threshold to Parliament.
Notably, the new debt threshold set in the new law will equally serve as a signal to the financial markets, Kenya’s domestic and international creditors, and bilateral partners that the country will be guided by the ability to repay its debt and not on the mere need to finance the annual budgets.
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