The sustainability of Kenya's debt remains a significant concern not only for authorities but also for the populace, financial institutions, and other key stakeholders.
- Kenya's economy has recovered significantly under challenging circumstances amid a global economic downturn and is anticipated to grow by 5.7 per cent in 2022.
- Despite significant setbacks, Kenya's structural reform strategy, which focuses on enhancing governance, has progressed.
- According to the Central Bank of Kenya, 57 cents of every dollar spent by taxpayers goes towards the country's growing debt.
Economic recovery and growth
Kenya's economy has recovered significantly amid a global economic downturn and is anticipated to grow by 5.7 per cent in 2022. In June, inflation surpassed the Central Bank of Kenya's (CBK) statutory target range of 2.5 to 7.5 per cent. It is predicted to peak this year before falling back into the band in early 2023.
In the short term, downside risks prevail. These include the uncertainties derived from the Ukraine conflict, the country's semi-arid regions' ongoing drought, volatile global financial market circumstances, and the political calendar. However, Kenya's medium-term prospects remain positive.
Fiscal space has been generated to temporarily cushion the increasing international energy costs on consumers and enterprises due to the extremely high tax performance witnessed in the 2021/22 fiscal year. The adopted budget for the fiscal year (FY) 2022/23 broadens revenue collection. It also maintains tight expenditure management and preserves social expenditures.
READ MORE: Growth in employment earmarks Kenya's post-pandemic economic
Despite significant setbacks, Kenya's structural reform strategy, which focuses on enhancing governance, has progressed. The supervision of state-owned corporations is being strengthened. The publication of beneficial ownership information of successful bids for public procurements will be made possible via new tender papers, a long-standing ambition.
There is an ongoing audit of COVID-19 vaccine expenditure. Furthermore, the government recently concluded a comprehensive audit of FY2020/21 spending, emphasising COVID-19. These moves will enhance transparency and allow enforcement agencies and other players to follow.
The debt situation
Kenya is one of 23 African nations at risk of debt distress. The major causes of debt distress include poor fiscal management and macroeconomic frameworks to sustain growth, a shift in debt structure toward more costly financing sources, and excessive government expenditure levels.
Kenya's debt was at about 70 per cent of GDP in 2021, up from 50 per cent in 2015. China is Kenya's biggest bilateral creditor. It accounts for 67 per cent of the bilateral debt (primarily for infrastructure projects), an increase from 13 per cent in 2011.
Multilateral debt accounted for 41 per cent of external debt in 2021, with bilateral debt accounting for 28 per cent. According to the Central Bank of Kenya, 57 cents of every dollar spent by taxpayers goes towards the country's growing debt. Kenya's national debt has more than tripled since 2000.
Earlier this year, Treasury officials raised the alarm about Kenya's massive debt problem. For the first time in Kenya's history, Treasury officials stated that the cost of repaying the national debt had overtaken the recurrent expenditure.
According to the Treasury, Kenya will now spend $11.8 billion annually on debt repayments, slightly higher than the recurrent expenditure and expected to be $11.08 billion in the next year. Kenya has to repay a loan of around $900 million to China's Exim Bank and interest payments to other governments and financial institutions this year.
Kenya's debt obligation struggles
The government recently imposed new taxes to fulfil its debt obligations. However, analysts have expressed concern that the higher levies would not be enough to cover the country's debt commitments. Kenya still struggles with the repayment of Chinese loans used to construct the standard gauge railway (SGR), emphasizing the country's challenges with growing public debt.
Kenya initially requested a six-month extension of the debt repayment moratorium from bilateral lenders, including China, until December 2021 to avoid letting up billions to Beijing creditors.
However, the creditors, notably the Exim Bank of China, declined Kenya's request for a loan repayment holiday, resulting in an impasse that delayed payments to projects supported by Chinese loans.
In January last year, China deferred the repayments. This allowed Kenya to keep Ksh27 billion ($223 million) due for the six months ending June 2021. To avoid straining ties with Kenya's largest bilateral creditor, Nairobi dropped its demand for an extension of the loan repayment holiday due to resistance from Chinese lenders.
However, the new administration intends to renegotiate the multibillion-dollar SGR loan with the Chinese government. Kenya's new government has argued that the country is up to date on its payments. However, they have reiterated that the government cannot continue with the current 20-year schedule.
Answering questions from a parliamentary committee, Kenya's new transport cabinet secretary, Kipchumba Murkomen, intimated that the government would have to seek an extended payment duration, particularly for loans used to construct the SGR.
Way forward
The sustainability of the country's public debt remains a significant concern. It is a worry for Kenyan authorities, the populace, financial institutions, and other key stakeholders. President Ruto has made clear his intentions to slow down on borrowing and instead focus on reducing public expenditure.
In his maiden speech to a parliamentary joint sitting, the President reiterated the need for Kenya to scale down on debt dependence. The President revealed that he had already directed the Treasury to find areas from which to claw back $2.48 billion from the 2022/23 fiscal year budget. This move is an immediate response to cushion the country from further debt vulnerabilities. The ultimate aim is to have a recurrent budget surplus in three years.
President Ruto has also focused on shifting to local borrowing as he narrows down on expensive foreign debt. Consequently, the government will issue a local bond denominated in dollars as it looks for alternatives to fund the budget. More Kenyans amassing dollars in banks as the dollar value rises. As such, the government intends to incentivize them to release the funds into the economy.
Sign up for free AllAfrica Newsletters
Get the latest in African news delivered straight to your inbox
The dollar bond will also relieve strain on the CBK after Kenya's import cover fell to its lowest in seven years. The fall points towards lower foreign finance despite a faster rise in imports than exports and a decline in remittances from Kenyans working abroad.
Reinforcing Kenya's debt management
The government's efforts to strengthen its debt management capacity need further reinforcement. The government should seek assistance and collaboration with development partners to improve the ability to manage public debt. This will also help in developing contingency plans to refinance external and domestic debt.
The government should also focus on enhancing timelines for debt information publication. This represents a critical component of sober public debt management. Timely publication of debt information helps policymakers make informed borrowing decisions. Moreover, it enables credible assessment of creditworthiness by creditors and rating agencies. It also keeps citizens informed about how governments spend public money.
The government needs to further deliver on public revenue mobilization. The mobilisation remains an essential ingredient of the ongoing fiscal consolidation. Consequently, the consolidation will improve Kenya's debt situation in the country. Kenya needs to exploit its full potential and revamp the low-performing domestic revenue.
READ MORE: Ghana sovereign debt crisis tip of African countries loan mess
