Kenya’s public debt crisis

Kenya’s ever ballooning debt is a matter of national debate. Even though there are two sides with counter argument for and against the growing public debt the consensus view is that its getting out of hands and the huge appetite for loans is real and concerning.

In recent weeks the raging debate has been brought back to limelight again thanks to the budget 2020/2021. One highlight was the Treasury comparing Kenya’s debt to GDP ratio to United States and Japan to argue a case for more debt to actualise growth. The comparison seems to overlook many variables and different circumstances of the countries mentioned. It ignores the fact that huge chunk of the borrowed money will go into servicing debts and paying salaries for civil servants and not in to development projects.

Kenya’s publict debt accounted for 62.1 % of the country’s Nominal GDP in Dec 2019, compared with the ratio of 59.3 % in the previous year. Kenya’s government debt to GDP ratio data is updated yearly, available from Dec 2006 to Dec 2019. The debt to GDP ratio reached an all-time high of 62.1 % in Dec 2019 and a record low of 39.2 % in Dec 2008.

Kenya’s current public debt as at February, 2020 stands at Kes. 6,158,003,120,000.00 and the debt to GDP ratio is expected to grow up to 64% by end of year 2020. In other words, the country owes more than half the value of its economic output (GDP). (Source : CBK reports/National Treasury)

The debt figure is composed of;

Domestic debt ksh. 3,040,964,550,000.00

External debt Kshs. 3,117,038,570,000.00

External debts are composed of bilateral debts, multilateral debts and foreign private loans which includes Eurobond 1 & 2. China is by far the biggest lender of bilateral loans to Kenya accounting for almost 70% of the figure.

Impacts of the growing public debt on the economy

Changing goal posts?

Kenyan lawmakers in 2019 approved the government’s plan to present the debt limit in absolute figures and not as a percentage of gross domestic product. The National Treasury proposed a ceiling of 9 trillion shillings ($86 billion), which allows it to increase borrowing to almost match the size of the entire economy, and would be about double the previous cap of 50% of GDP, with the debt at net present value. This is alarming but what are possible impacts of the current debt climate in Kenya?

Due to the government ever increasing borrowing which is not in tandem with GDP growth, there is a huge deficit in the current budget for the financial year 2020/2021. This has led to various measures including cutting down on government expenditure among other things. However, Keynesian theory stipulates that reducing government expenditure reduces consumption power of consumers lowering the aggregate demand level in the economy, this in turn slows down the rate of economic growth.

Increase in the tax burden to the taxpayers. An example is the recent increase in taxes on liquor, pensioners and importers. The finance bill 2018 imposed VAT @8% on fuel and Kshs. 18/ltr of kerosene as tax among others. Heavy tax burden on Small and Medium enterprises has resulted in many businesses closing the shop.

Huge government borrowing from the domestic market means that private firms in the country will be competing with the government for loans. This would push interest rates up and it would thus become difficult for firms to access credit.

Interest and principal repayments on external debts are made in foreign currency. This depletes a country’s foreign exchange reserves and may devalue the domestic currency rendering imports expensive.

The steep rise in debt means a looming increase in debt servicing obligations, including interest and principal repayments, whose ultimate impact is to increase recurrent expenditure and a squeeze on development spending.

Various measures taken by the government on cutting costs and raising revenues has led to steep rise in the costs of goods and services making the life of ordinary Kenyans expensive.

Opinion

Treasury chiefs project in draft Budget Review and Outlook Paper that total debt will jump to nearly Sh7.17 trillion in the year ending June 2022. Unsustainable debt levels can be harmful. They can “crowd out” development and social programmes because huge portions of government revenue are taken away from essential services and used instead to service debt. In the worst case scenario, Kenya might be forced to cede control of its strategic national assets to foreign creditors. This has happened in some countries such as Sri Lanka which had to hand over a strategic port to China.

Measures

To avoid a looming debt debacle, the country must put in place measures both short term and long term to arrest the situation.

Debt restructuring may help the government renegotiate some terms of the loans. Altering payment period or reducing interest rates may help in spreading debt servicing over long period and ease the burden.

The country should embark on putting better public debt planning mechanism in place. Planning would help realise short term and long term need for loans and capacity to service them.

To reduce its burgeoning public debt burden, Kenya must improve its production capabilities in the long term. This can be achieved in several ways. The country must increase its investment in human capital to promote entrepreneurial activity. There must be shift from exporting raw materials to value addition and manufacturing. Attention should be directed to developing local enterprise especially those that produce import substitutes. In the agricultural sector, sugar and rice are two examples.

Measures must be put in place to reduce government spending and to enhance revenue collection but only as short term solution.

Reference Central Bank of Kenya Public debts reports Tradingeconomics.com

Categories:Opinions

3 replies

  1. well articulated, Kenya need to come up with debt management solution, both long and short term to arest the current debt crisis that is looming at a very high rate.

    unless a formidable solution is put in place, we might head the Sri Lanka way where the creditors are in control of a very sensitive national asset to service it’s owned credit by the sri Lankan government.

    Like

  2. When Kenya borrows to pay for infrastructure investment that can boost long-term growth, which in turn generates revenues to service the higher debt but more than 70 per cent of our budget goes to recurring expenditure.
    The use of debt can be beneficial, where the economic activity generated is sufficient to repay the borrowing with interest.
    But the build-up of debt over the past 10 years has been excessive, beyond repayment capacity.

    Ngujiri

    Like

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