Since 2020, when Kenya’s risk of debt distress was raised from moderate to high due to the impact of the global COVID-19 crisis, as reflected in the joint World Bank-IMF debt sustainability analysis report, the country has remained at high risk.
Even so, Kenya recorded a decline in its public debt-to-GDP ratio in FY 2023/24.
According to the World Bank’s latest economic update for Kenya, the total public debt-to-GDP ratio decreased from 72% in FY 2022/23 to 65.7% in FY 2023/24. This was largely due to the appreciation of the Kenyan shilling against the dollar, which lowered the cost of external debt in local currency terms.
The shilling, which stood at Sh129.50 as of December 11, 2024, appreciated by over 20% since the start of the current year, owing to factors such as the Eurobond buyback in February and the weakening of the dollar.
However, despite these improvements, Kenya’s debt levels still pose a high risk of financial strain. The country not only records lower-than-expected revenue but also faces rising debt service payments.
According to the World Bank report, total revenue (including grants) as a share of GDP increased to 16.9% in FY 2023/24, compared to 16.7% in the previous fiscal year. Although this marked an improvement, it fell short of the fiscal year target by about 1.9% of GDP, largely due to underperforming revenue sources.
On the other hand, interest payments have been rising, with debt service costs increasing to 5.3% of GDP, or about one-third of total revenues (including grants).
With interest payments projected to rise to 5.6% in FY 2024/25, government expenditures, particularly on development, are expected to see a decrease in their allocation.
Unlike the previous year, when external debt made up 53% of total public debt, in FY 2023/24, domestic borrowing accounted for the largest share—51.1% of total debt.
According to the report, treasury bonds make up the largest portion of domestic debt (86.9% in FY 2023/24), while the largest share of external debt remains with multilateral creditors (53.9% in FY 2023/24).
The shift towards domestic borrowing in Kenya is largely due to the rising costs associated with external borrowing. Affected by currency fluctuations, external debt carries particularly high interest rates and increased debt service obligations. However, as domestic debt costs are expected to decline with falling interest rates, it remains more appealing.
This reliance on domestic debt, however, is already affecting the economy, as it continues to crowd out the private sector, which already faces challenges in accessing funding.
The report advocates for expanding the tax base, enhancing compliance, and rationalising expenditure as means of addressing the rising risks.
The World Bank also downgraded Kenya’s 2024 economic growth outlook from its 5% projection in June 2024 to 4.7%.
