Over the last many months, my two good friends, businessman and presidential aspirant Jimi Wanjigi and Busia Senator Okiya Okoiti Omtatah have variously made claims that Kenya’s domestic debt is illegal, odious and should not be repaid. This is big. Wanjigi and Omtatah argue that Kenyans should declare the domestic debt unenforceable because the debt doesn’t comply with the law that requires government to borrow only to finance specified development projects. The kicker here is the claim that parliamentary approval has never been sought or obtained by any Kenyan government for domestic debt and that the government has gone on an illegal borrowing spree for decades; all resulting in a domestic debt more or less equivalent to the foreign debt.
Wanjigi and Omtatah accept that short term Treasury Bills are authorised under the Public Finance Management Act (PFMA), but argue that Treasury Bonds as presently issued violate the Constitution and s.15(2(c) of the PFMA which states that “over the medium term, the national government’s borrowings shall be used only for the purpose of financing development expenditure and not for recurrent expenditure”. It is a matter of fiscal responsibility, they say, that the government should borrow only for investment and not for consumption.
It appears that even after the PFMA was enacted in 2012, we slept while government continued its age-old practice of borrowing externally for development purposes and domestically for recurrent expenditure. As we slept, runaway borrowing under Uhuru Kenyatta ended in a staggering increase in the size of the government budget and its debt component.
Omtatah and Wanjigi charge those who lend for the domestic debt, especially commercial banks, with the moral crime of profiteering. According to the latest debt statistics the Government owes at least KSh 4.2 trillion on domestic debt alone. The creditors holding this debt are our commercial banks, insurance companies, pension funds including the National Social Security Fund (NSSF), public universities and state owned enterprises. It is they who will lose their investments if the courts agree with Wanjigi and Omtatah, and the rest of us will be the collateral damage in all this. You see, these government creditors lent the state the money which the rest of us placed with them as either a deposit, a pension contribution, an insurance premium or even a conditional grant from taxes. Bottom line, if the government debt is disavowed, then our deposits, premiums, contributions and taxes will definitely be completely lost.
Just read the balance sheets of our banks; they make most of their money from lending to government. As Dr. David Ndii put it in 2020, “the industry made a consolidated profit of Sh110b, and Sh119b in interest from government securities. Considering that lending to government is virtually costless and risk-free, this implies that banks made all their profits from the government, and lost Sh9b on the business they did with the rest of the economy.”
For the finance industry, government bonds are a nice solid investment, protected by law and tradition. For a start this is sovereign debt; the first charge on the Consolidated Fund. You, as a bond holder, are paid your interest before the President gets his salary, and certainly before any locally financed development projects. Secondly, default on the Sovereign Debt triggers blacklisting by other potential lenders – the kiss of death for a debt soaked government like ours. So government, it is expected, will always find a way to pay even if it means a tax hike.
Third, even though what Wanjigi and Omtatah are saying may be true, to wit that Parliament must authorise the taking of domestic debt which must be tied to specific development projects, this practice of untethered borrowing by government has been going on since independence, and there is no precedent for the courts challenging government borrowing practices in 60 years. Finally, a conservative judicial system like ours is more than likely to fall on the side of the banking sector, the bond-holder, and prevent their bankruptcy rather than applying the PFMA in stricto sensu. In other words, a solution will be found to protect you as a bond holder.
But the awkward silence of the Treasury and the Central Bank of Kenya (CBK) in the face of Wanjigi’s and Omtatah’s sustained campaign should worry the finance industry and Kenyans generally. In my personal experience, Treasury is quick to defend its turf. I recall 2009 when it aggressively fought to counter civil society which revealed the USD 120 million “typing error”, and 2007 when Treasury waged an advertising campaign to pretend that the Anglo Leasing irrevocable promissory notes were revocable. We all know how both affairs ended, but the point is when Treasury is right, and when it is wrong, it is rarely silent. In a globalised age of capital, this matter is definitely signalling abroad. As if foreseeing an issue with repayment, one merchant banker recently advised their clients to sell Kenyan bonds and buy Angola.
Treasury and the CBK cannot much longer fail to confront the odious debt claim. The Omtatah petition against the Finance Act 2023 raises the constitutionality of the domestic debt and may be the cage in which the CBK, Treasury, Wanjigi and Omtatah will eventually meet. That is to say, if the Courts permit the laying of substantive evidence, and does not strike out Omtatah’s documents like they did in the SGR cases.
Clearly, if the domestic borrowing has been illegal, it must be legalised henceforth. But the real world consequences of this determination will surely weigh heavily on our Judges as the matter goes to court in Omtatah’s petition against the provisions of the entire Finance Act 2023.Meanwhile, the beat goes on at the CBK. It has just published a prospectus for two new Treasury Bonds worth 40 billion shillings.