Kenya Nears Debt Cap as Wage Demands Pressure Budget

Kenya’s increasing stock of international debt is approaching the government’s ceiling and a strike by school teachers for higher pay is adding to public-spending pressures, the country’s Parliamentary Budget Office said.

The amount of external borrowing could reach about 1.1 trillion shillings ($12.7 billion) by the end of June 2014, moving toward the state’s 1.2 trillion-shilling debt limit, Martin Masinde, deputy director of the office, said by phone. The government has also tapped the maximum amount it can access from an overdraft facility at the central bank, the Nairobi-based office said in an e-mailed statement.

President Uhuru Kenyatta on July 4 asked school teachers to end a two-week strike and resume negotiations, with the government offering to hire 10,000 more teachers, among other things. The salary demands are adding to pressure on Kenya’s public wage bill, which at about half of tax income is “very high” the International Monetary Fund said last month.

“The ongoing teachers strike is likely to exert pressure on the wage bill,” the budget office said in its report. “This may consequently lead to a systemic push for higher wages in the other sectors of the public service. The economy may plunge into wage-push inflation tendencies.”

Inflation accelerated to 4.9 percent in June, near the lower end of the government’s 5 percent to 7 percent target.

The government said last year it would introduce new taxes and cut spending to fund the 25.5 billion shillings in wage increases teachers, doctors, and lecturers were calling for.

Growing Economy

Rising debt levels could reduce the allure of Kenyan assets, including the shilling and stocks, over the “medium- to long-term,” according to Vimal Parmar, head of research at Nairobi-based Burbidge Capital.

“It will increase the risk,” Parmar said today by phone.

The shilling depreciated for a fourth day, falling 0.4 percent to 86.80 per dollar by 4:21 p.m. in Nairobi, taking its decline this year to 0.8 percent, according to data compiled by Bloomberg.

Kenyatta, who in April began his first, five-year term in office, is targeting growth in East Africa’s biggest economy of at least 10 percent from 5.8 percent this year. Kenya is the world’s biggest exporter of black tea and supplies a-third of all flowers traded in Europe.

Kenyan commercial banks have been slow to lower the cost of credit in line with reductions to the key lending rate, with some lenders not reacting at all, the budget office said. The average interest rate spread -- the difference between commercial banks’ interest rates and deposit rates -- has been maintained at about 15 percent over the past 15 months, it said.

Policy Meeting

Kenya’s central bank has lowered its policy rate to 8.5 percent from 11 percent so far this year, adding to 11 percentage points of reductions in 2012 from a record high. Monetary policy makers are due to meet tomorrow. All 10 economists and analysts in a Bloomberg survey forecast the rate would remain unchanged at that meeting.

Legislators in January raised the ceiling on public debt to 1.2 trillion shillings from 800 billion shillings, according to a copy of Hansard e-mailed by the budget office.

(Parliamentary Budget Office corrects source of debt in first paragraph and time period, attribution in second paragraph in story published July 8.)
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