Debt Status in Kenya: The Investment and Financial Analysts' Perspective
8 November 2019
The Kenyan debt is the sum of all outstanding debt owed by the Government. Data from the Central Bank of Kenya (CBK) as of March 2019 states that Kenya’s public debt stands at approximately Kenya Shillings 5.425 trillion (USD$54 billion). In addition, the public debt to nominal GDP as of December 2018 was at 59.2%, a significant increase since December 2009 at 41.1%. In simple terms, the country owes more than half the value of its economic output (GDP). The International Monetary Fund (IMF) recommends that ratios of public debt to GDP should not be higher than 40% for developing countries. The National Assembly and Senate then approved the increase in the debt threshold to Kshs 9 trillion to allow Treasury meet its annual budget in the foreseeable future. The Treasury insisted that the debt, which it says it assesses with a 20-year forecast, is still sustainable as long as it is below the threshold of 70 percent of GDP.
A paper from the European Journal of Accounting Auditing and Finance Research on “External Debt and Economic Growth: The Nigeria experience” sought to find out the role of external debt in an economy. The paper concluded that external debt stock and debt service payment had negative impact on the same economy as a result of corruption, misuse of funds and excessive wastage of resources. The study recommended amongst others, that the Debt Management Office (Treasury) would need to set mechanisms in motion to ensure that the advances were employed for purposes for which they were acquired as well as set a ceiling for borrowing which would be applied to Nigerian states and federal governments grounded on a well-defined criteria.
External debt may not necessarily be harmful to an economy. In fact, a study on “The Effect of External Debt On Economic growth” from Södertörn Universities School of Economics show that external debt inflows, if synchronised with business cyclicality, can stabilise the economy and boost economic growth IF utilized resourcefully and effectually. Other studies on “The External Debt of Sub-Saharan Africa: Origins, Magnitude and Implications for action” by the World Bank also suggest that, if the available external loan improved the productive capacity of the borrowing country, it would be unnecessary to take extra external loans to service the original debt (debt refinancing).
Overall, unsustainable debt levels in the long-term are harmful to an economy. They can deter development and social programmes geared towards development through practical methodologies in identifying projects and prioritizing those projects such as the Big 4 Agenda and Vision 2030. This is because significant portions of government revenue are taken away from essential services and used instead to service debt, amongst other misdeeds including misuse of funds and corruption.
Correspondingly, if interest and principal repayments on external debt are made in foreign currency, this depletes a country’s foreign exchange reserves and may devalue the domestic currency. The country would be required to “pay up” the loans when due, necessitating issuance of local bonds at high interest rates to service external debt and by extension, eroding the purchasing power of the local currency which would slow down economic growth. Slower growth leads to increased unemployment levels, which results in a lower standard of living for Kenyans. Kenyans will have to pay for a significant number of years and the government will continuously borrow at exponential levels. As well, higher interest rates would reduce the amount of private capital available for investments, which then dissuades economic growth.
This kind of borrowing may be unsustainable.
Firstly the Government will need to reduce the public debt levels through various options such as increasing its tax revenue to GDP from its current level of 15.5%, which has been declining for the past 3 years (2015 - 16.26%, 2016 - 16.184%, 2017 – 15.67% and 2018 - 15.5%) based on data from the World Bank. This can be done through investing in the growth of SMEs. Secondly, the Government should promote the manufacturing sector to focus on creation of high quality products for exports.
The more the Government borrows, the higher the interest payments, which may become more expensive for the Country to refinance its existing debt.