Budget experts have warned that the government is likely to breach the Sh9 trillion debt ceiling by early 2022 if the rate at which it is borrowing to support its budget and finance ambitious capital projects is anything to go by.
In 2019, parliament amended the Public Finance Management (National Government) Regulations to increase the country's debt limit from 50 percent of Gross Domestic Product (GDP) to the numerical figure of Sh9 trillion.
The International Budget Partnership Kenya (IBPK) says the advent of Covid-19 pandemic will exacerbate the country's financial instability.
It could mean that the government will not realise its revenue targets to finance the Sh841 billion deficit in this financial year's Sh3 trillion budget.
Read: Expensive loans expose Kenya to debt crisis
IBPK country manager, Dr Abraham Rugo, says Kenya's biggest problem is that revenue collection has not performed as projected in the 2020 Budget Policy Statement (BPS) due to the Covid-19 scourge yet expenditures have continued as though everything is normal.
"At this rate breaching the debt ceiling is a looming possibility because the country is surviving on loans but wants to continue with its ambitious projects," Dr Rugo notes.
For instance in the first quarter of the 2020/21 financial, Kenya Revenue Authority (KRA) recorded a shortfall in tax revenue collection of Sh317 billion, 15 percent drop from what was projected, as the effects of Covid-19 pandemic took a toll on the economy.
"Everything that can go wrong from a fiscal policy standpoint is going wrong. The only thing that seems not to take the heat is the government expenditure," he adds.
Read: Debt weighs down Kenya's economic growth outlook
On Tuesday last week, National Treasury Cabinet Secretary Ukur Yatani told Finance and Planning committee of the National Assembly that the country's public debt had surpassed the Sh7 trillion mark, about 71.2 percent of the Gross Domestic Product (GDP).
This is despite concerns from Bretton Woods institutions- International Monetary Fund (IMF) and the World Bank of the country's inability to repay the loans, a majority of which are commercial.
Although IBP says that Kenya piled a debt of Sh1.1 trillion between January 1 and September 30 this year, documents from the National Treasury submitted to the National Assembly indicate otherwise.
The documents show that Sh322.17 billion was procured between May 1, 2020 and August 31, 2020, from various commercial and multilateral lenders.
Another Sh132 was borrowed between September 30, 2019 and April 30, 2020.
Of the current public debt stock, Sh3.66 trillion is in external debts (51 percent) with Sh3.45 trillion in domestic debt (49) percent.
According to Mr Yatani, China is Kenya's leading bilateral lender at about Sh750 billion though it could be more.
IBP Kenya senior researcher Mr John Kinuthia notes that if the trend continues, KRA may collect just under Sh1.3 trillion from taxes in the current financial year compared to the projected Sh1.57 trillion, paving the way for increased borrowing from local and external markets.
It is also doubtful that the country will raise the required Sh66.13 billion in non-tax revenue to fund this year's budget, which means even more borrowing.
"The shilling has heavily depreciated. With the external debt being dollar dominated, it means that every time the shilling depreciates, our debt bill is bound to go up because the National Treasury has to buy dollars and other foreign currencies including the Euros to pay those the country owes money," Mr Kinuthia says.
Details from the National Treasury show that the currency composition of the country's external debt is dominated by the US dollar at 70.3 percent.
The Euro is at 17 percent, Chinese Yuan 5.4 percent Japanese Yen 4.3 percent and the Sterling Pound (GBP) 2.4 percent while other currencies account for 0.3 percent.
A simple explanation by Mr Kinuthia is that if the country was to pay Sh100 at the beginning of the year and the shilling depreciated by Sh10, it means that the debt for the same dollar went up to Sh110.
The budget experts further argue that the move by the government to increase the debt ceiling has compromised its bid to comply with the region's debt agreement that is equivalent to 50 percent of GDP.
Read: Public debt to hit Sh7.5trn by June next year, says report
This has weakened Kenya's debt sustainability indicators, according to the Parliamentary Budget Office (PBO) 2019 report on the amendments to the PFM regulations.
The PBO further argued that this puts Kenya in a difficult position of complying with the East Africa Community (EAC) agreement on the attainment of a single currency regime that is critical to the realisation of the region's political federation.
According to the Kenya financial stability report for October 2020, Kenya's economy grew by 5.4 percent in 2019 and was projected to grow by 6.2 percent in 2020.
However, the Covid-19 pandemic has weakened the country's economic growth outlook in 2020, due to the containment measures employed by the government against the pandemic. "These measures disrupted supply chains and impacted negatively on household livelihoods, resulting in subdued aggregate demand," the report says.