In the last two years, attention has been on Kenya’s deepening public debt as signs of fresh economic pain loom. According to data from the Central Bank of Kenya (CBK), the total public debt stood at Sh10.2 tn as of June 2023, compared to Sh8.6 tn recorded in June 2022.
Kenya’s debt composition has been evenly distributed between domestic and external borrowing. However, the challenge is that, since the beginning of 2023, there has been a shift towards external borrowing with external debt against domestic debt swinging from 54.3% to 45.7% in September 2023, compared with 49.8% to 50.2% observed over a similar period in 2022.
The shift has been brought about by the government’s revision of its domestic borrowing target for the FY 202/24 from the initial Sh586.5 bn to Sh316.0 bn, a move aimed at taming the pressure on domestic borrowing rates hence bolstering foreign reserves by increasing the government’s efforts on sourcing for bilateral and multilateral funding
This has in turn increased the debt to GDP ratio to 70.2% as of June 2023, which is 20.1% points higher than the International Monetary Fund (IMF) threshold of 50% for developing countries, up from the 66.7% recorded in June 2022. But let’s go back to July 2023 when the debt service to revenue ratio hit an all-time high of 101.4%. It is this surge in the public debt that is continuing to weigh on the government’s expenditure. The upcoming maturity of $2bn Eurobond in June 2024, in huge part, will also pile pressure on the government as far as debt repayment is concerned.
The road to ensuring strong economy is still long. You only have to look at firms which have witnessed immense losses, with more and more winding up, or restructuring, jobless and disenchanted young people many of whom are below the age of 35. Already, 67.1% of Kenya’s external debt is US dollars denominated, thus putting more pressure on debt servicing. Another hard part is how we can trim domestic borrowing in order to ease the pressure on interest rates.
When it comes to taming high public debt, and improving investment climate, it is critical for the government to figure out viable options – from implementing a comprehensive debt management strategy that will encompass short, medium, and long-term objectives to reforming capital markets, improving the flow of capital and foreign direct investments (FDIs) into the country to strengthening regulatory and supervisory framework of capital markets.
It can start by formulating export and manufacturing favourable policies. This would stabilize the exchange rate and stop our foreign denominated debt from increasing as the shilling depreciates. Similarly, the government should strengthen tax collection and administration to improve revenue collection without increasing tax rates significantly. This can be done through broadening the tax base while ensuring tax policies are equitable and do not disproportionately burden the lower-income segments of the population.
What will guarantee success regarding unsustainable debts is efficiency, stability, and inclusiveness of the financial sector, especially regarding markets for stocks, bonds, and other securities.
