21 November 2017

Kenya: Red Flag Raised Over Growing Public Debt

Kenya risks failing to qualify for new loans to finance development projects due to the rising public debt, whose repayment is cutting into the smooth running of the government, economists have said.

The Kenya Institute of Public Policy Research and Analysis (KIPPRA) said the growing public debt coupled with the increased volume of commercial loans are narrowing the window for future borrowing.

The economists in their Economic Report for Kenya (2017) said the government will be forced to reduce spending on key infrastructure projects to repay the loans.

"The high level of public debt in Kenya narrows the window for future borrowing and increases vulnerability to fiscal risk in the event of any urgent need for borrowing," they said.

"Higher levels of repayment of increased public debt would mean that resources are taken away from financing development projects."

According to the report, Kenya's external debt is on concessional terms, but the non-concessional component is increasing the country's exposure to borrowing.

Debt affordability

Global rating agency Moody's said the government's debt affordability has deteriorated in the past five years due to the erosion of government revenue and the subsequent shift to debt from the private sector on commercial terms.

Jan Mikkelsen, IMF representative for Kenya, told The EastAfrican that the country must reduce its fiscal deficit to contain debt vulnerabilities.

The country's gross public debt is currently estimated at Ksh4.04 trillion ($40.4 billion) compared with Ksh3.76 trillion ($37.6 billion) last year.

The debt-to-GDP ratio has risen to 56.4 per cent from 52.6 per cent last year. The East African Community Convergence Criteria threshold stands at 50 per cent.

Public debt in the 2000/2001 fiscal year stood at Ksh109.93 billion ($1.09 billion), and Ksh97.69 billion ($976.9 million) in the fiscal year 2001/2002.

National Treasury Cabinet Secretary Henry Rotich said plans are underway to take on another commercial loan to repay a two-year $750 million syndicated loan that matured in October this year, but was extended by another six months to April next year.

The loan, which was priced at 5.7 per cent per annum, was obtained from Citigroup Inc, Standard Bank and Standard Chartered Plc to address interest rate pressures in 2015.

The chief economist at Standard Chartered Plc, Razia Khan, said high debt level raise debt service costs, diverting resources to the servicing of debt rather than capital expenditure and growth-enhancing investment in the future.

According to KIPPRA Kenya's savings-investment gap has remained high over time while the level of exports has declined, implying that there is a need to boost the mobilisation of domestic resources to finance projects.

Kenya's total trade decreased by seven per cent to Ksh2 trillion ($20 billion) in 2016 from Ksh2.15 trillion ($21.5 billion) in 2015, while total exports declined by 8.2 per cent to Ksh 578 billion ($5.78 billion).

According to the National Treasury, the government's revenue collection has been below target since the beginning of the 2016/2017 fiscal year, while increasing expenditure pressures continue to widen fiscal deficit.

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