Opinion

CBK should reject plan to defer interest payment on public debt

CBK should reject plan to defer interest payment on public debt
  • As we all know, debt service is a first charge on the Consolidated Fund Services.
  • The coronavirus pandemic must not be used as justification for yet another raid by the political elite on assets belonging to pensioners.

We want to provide support to the government by deferring interest payments falling due in the period up to December 2021 on certain of our existing holdings of government securities,” says a draft letter to the Central Bank of Kenya by the pensions industry.

Away from the limelight, pensions schemes and fund managers have offered the government a moratorium on interest payments on government paper for two years and I have received new information on the background to this very controversial deal.

Here is the background to the matter. On Tuesday last week, the Retirement Benefits Authority (RBA) led a delegation of 20 of the largest pension schemes and fund managers in the country to the National Treasury to discuss how pension schemes can contribute money to help the government finance the fight against Covid-19.

According to what I have gathered from insider sources, that meeting tentatively agreed to the offer subject to approval by the Central Bank of Kenya.

The letter I have quoted at the beginning of this article is a prototype of the draft that was supposed to go the Central Bank of Kenya. I have come across correspondence revealing that, before the meeting, a leading service provider in the retirement benefits sector had written to the government suggesting that President Uhuru Kenyatta should invoke the Disaster Management Act to force the proposed two-year moratorium on interest payments on people and institutions who hold government paper.

PENSIONS

On paper, the offer by the pensions industry is very attractive. Consider that, today, total pensions assets are estimated at Sh1.3 trillion and 40 per cent is invested in Treasury Bills and Bonds for which the government approximately pays Sh60 billion in interest payments.

Thus, a moratorium on interest payments for two years as proposed by elements within the pensions industry could unlock for the government Sh120 billion in two years. I am opposed to this idea because what these elements in the pensions industry have done amounts to an invitation to the government to default on public debt.

Which begs the question: Have these people considered the damage a default on government debt can do to the sovereign’s credit rating? How about the likely impact on the country’s borrowing costs? I know from what I have read in public finance management that the obligation to servicing public debt is a constitutional matter that cannot be abrogated by legislation.

As we all know, debt service is a first charge on the Consolidated Fund Services. When you invite the President to invoke the Disaster Management Act to default on payment of public debt obligations, you are leading the country astray.

The governor of the CBK, Dr Patrick Njoroge, must reject this proposal. We must remember that during the Eric Kotut years as Central Bank governor, the moves and decisions by the Central Bank created so much uncertainty in the market leading to a spike of interest rates to an unprecedented level of 90 per cent. Today, Argentina is still suffering from the consequences of default on public debt many years after it defaulted on debt payments.

As fiscal agent of the issuer, Dr Njoroge must reject this proposal because it is bound to introduce uncertainty in the marketplace. At risk is the risk-free status on government paper. When you introduce doubt and uncertainty around the benchmark rate, you also interfere with conduct of monetary policy — the core mandate of the Central Bank.

INVESTORS

You risk a stampede away from government paper by non-resident investors on government securities with grave consequences to the exchange rate.

Apparently, the elements in the pensions industry behind the proposed moratorium in interest payments have also proposed that the government should consider borrowing Sh25 billion from the National Social Security Fund to raise money to fight the coronavirus pandemic.

Isn’t it just obvious that any money borrowed by the government from the NSSF will never, ever be paid back?

Successive administrations in this country have over the years treated the NSSF as a source of inexhaustible largesse. The coronavirus pandemic must not be used as justification for yet another raid by the political elite on assets belonging to pensioners.

All over the world, governments are struggling to raise funds to tackle the pandemic. This idea of raiding pensioners’ savings and using private money as if it was tax revenues is a Kenyan invention.

Is it not the height of irony that the government, in the name of raising money for the coronavirus, is also considering to raid Sh10 billion from the Unclaimed Assets Authority?