Public Debt and Liability Management
Debt
Public Debt and Liability Management
Syllabus tag: KASNEB CPA | Advanced Level | CA35S2 Advanced Public Financial Management
1. Composition of Kenya's public debt
Kenya's public debt comprises:
- Domestic debt: Treasury bills (T-bills, short-term: 91, 182, 364 days), Treasury bonds (medium/long-term: 2–30 years), overdraft from the Central Bank, and advances from commercial banks
- External debt: bilateral loans (government-to-government), multilateral loans (World Bank, AfDB, IMF), commercial loans (Eurobonds, syndicated loans), and export credit agency facilities
2. Debt management objectives
The Public Debt Management Office (PDMO) within the National Treasury manages Kenya's public debt. Objectives: ensure financing needs and obligations are met at the lowest possible cost over the medium to long term, consistent with a prudent degree of risk; develop and maintain an efficient domestic financial market.
3. Debt Sustainability Analysis (DSA)
The DSA assesses whether a government can service its debt without exceptional financing. Key indicators monitored:
Debt/GDP ratio — should remain below agreed ceiling
Debt service/revenue — measures affordability of debt payments
Debt service/exports — for external debt sustainability
Interest/revenue — share of revenue consumed by interest
The IMF and World Bank conduct joint DSAs for low-income countries (including Kenya) using the Debt Sustainability Framework (DSF). Countries are classified as low, moderate, high, or in debt distress.
4. Types of debt instruments
Treasury bills: short-term instruments (91, 182, 364 days) issued at a discount. Used for cash management. Liquid market developed at the Central Bank.
Treasury bonds: fixed or floating rate, medium to long term. Infrastructure bonds (tax-exempt to investors, used to fund specific infrastructure projects). Retail bonds to mobilise domestic retail savings.
Eurobonds: Kenya issued its first Eurobond in 2014 (USD 2 billion at 10 years). Eurobonds access international capital markets but expose the government to exchange rate risk.
5. Contingent liabilities
Contingent liabilities are potential obligations that may arise from: government guarantees to state corporations; public-private partnership (PPP) commitments; pending litigation; unresolved claims. The PFM Act requires accounting officers to disclose and manage contingent liabilities prudently. If called, they become direct liabilities on the Consolidated Fund.
6. Debt service computation
Annual interest payment = Principal outstanding × interest rate
Annual principal repayment = Principal / remaining years (straight-line)
Total debt service = Annual interest + Annual principal repayment
Balance outstanding after year n = Principal – (n × Annual repayment)
7. Sinking funds
A sinking fund is a reserve accumulated over time to retire a specific debt at maturity. Regular contributions are invested, and the proceeds are used to repay the principal when it falls due — reducing the refinancing risk (the risk that new borrowing cannot be arranged at acceptable rates).