WEHLIYE: Uhuru had better alter some of Jubilee’s mega projects

In March last year, I wrote an opinion piece for this newspaper titled ‘Jubilee should shelve its grand poll promises’. My argument then was that the administration was taking on too much and will at some stage over extend its capacity and then hit a brick wall all too soon unless it shelved some of its mega projects.

The administration seems to have hit that wall even sooner than I thought. Reforming to transform is a marathon and not a sprint. And as Kenyans, the home of the long distance runners, we should know better than anyone else about the endurance and tenacity required to run long distance running. Going for rapid results and growth over a short period is similar to sprinting, fast yet not sustainable.

What the current administration needs to do now is to pause and think about how they can change to the long-distance running mode, a little slower, but healthier and more sustainable.

The Jubilee administration’s economic council (if they have one) needs to go back to the drawing board and look at which projects to set aside and which ones to implement with whatever resources are available instead of attempting to plough the entire field.

It is one thing to make promises during a campaign period and another to fund them. Nation building can’t be accomplished overnight and the administration should not make so much haste to accomplish everything it promised in one breath even when the prevailing economic environment does not allow.

The administration must realise that we face serious debt challenges in 2016 because bunching of maturities will likely disrupt refunding operations. (President Mwai) Kibaki’s treasury issued Infrastructure Bonds between 2009 and 2012 that will all mature in 2016.

The current administration then added two-year bonds and other short-term domestic debt in 201314 that will also mature next year. So we have a situation where as at December 2014, almost 650 billion of debt will mature in 2016, posing a huge refinancing risk.

This, even before adding the short term domestic debt borrowed this year that will also mature in 2016. Unfortunately such a scenario can only be dealt with through more borrowing and at a time it will be difficult to restructure domestic debt given the high interest rate regime. So, further expensive bank syndicated loans or even another Eurobond looks the only way out of the potential 2016 debt refinancing quagmire.

Being a pre-election year, there is also the likelihood that fiscal policy will be loosened while in the monetary policy front, the expectations is tight policy given the US Fed is likely to hike short-term interest rates after more than seven years of loose monetary policy.

So, unless some of the mega flagship projects are set aside, interest rates are likely to be sustained in mid-20s and we could find ourselves in a debt crisis. As I have always argued, I still believe that our national debt is sustainable at current levels but its management remains poor.

The poor debt management strategy and operations of this administration have resulted in a skewed maturity profile with interest payments on public debt now constituting a big percentage of our budget deficit. Sometimes your debt levels could be sustainable but your debt management strategy can jeopardise your fiscal situation and financial stability.

Unfortunately, that is what is happening now and if we are not careful, we could find ourselves in a self-reinforcing vicious cycles that has put other countries in a bad position in the past. The cycle that is triggered by poor debt planning with bunching of maturities and pressure to refinance by government leading investors to demand higher interest rates.

Campaign promises

Higher interest rates then makes the country’s debt burden onerous. Government then borrows to pay its debt obligations. When that cycle takes hold in a truly vicious way, the only endings are high inflation or a default even when debt relative to GDP is within the required thresholds.

President Uhuru Kenyatta and his administration would need to convince Kenyans that there is nothing sacrosanct about the campaign promises that made Kenyans to vote for them.

The fear of being told it failed to deliver on certain promises should not make the administration be blind to the realities on the ground. Stabilising the macroeconomic environment is currently far more important than initiating the building of new roads and stadiums.

Furthermore, Kenyans will judge President Uhuru Kenyatta harsher if their living standards continue to worsen in the short run simply because his administration is hell bent on fulfilling promises he made during the campaigns.

Promises whose benefits will only be felt many years after he leaves office. We know you cannot take promise-making out of politics but if these promises would turn out to be the very long rope with which the administration will hang itself, then, it gives cause for serious concern. Given the peculiarities of the current macroeconomic environment, it is only prudent that the government cut its coat according to the current status of the country’s economy, not its ego or its manifesto.

The truth is that whether by accident or by design, the going is tough. This economy cannot live with another few years of mid-20s interest rates.

Initiating all kinds of projects about which promises were made on the spur-of-the-moment during political campaign stunts will only help to worsen the economic situation and paralyse the government itself.

We will pay a very heavy price if short-term political needs are placed before the national interest.

Wehliye is senior vice president, Financial Risk Management, Riyad Bank, Saudi Arabia