Kenya's debt burden to hit 72.6% of GDP by 2023

By Susan Nyawira, NAIROBI Kenya

Kenya's debt ratio compared to the value of goods and services produced in the country is fast rising, a trend that Credit rating firm Moodys says raises concern.

 Graph showing Kenya's surging debt.

It projects the country's debt and interest burdens to peak to 72.6 per cent of GDP and around 28 per cent of revenue by 2023, up from 65 per cent in 2020.

This, the firm said, could increase financing risks unless Kenya delivers on its set ambitious fiscal consolidation targets as part of the IMF program.

The projection is an indication that the country's debt will continue to balloon, having crossed the Sh7 trillion mark in 2020 up from Sh5.81 trillion in 2019.

It has been rising by almost Sh1 trillion annually in the last six years, having jumped to Sh5.04 trillion in 2018 from Sh4.41 trillion in June 2017.

Kenya plans gradual fiscal consolidation that will limit the deterioration in the sovereign's debt and interest burdens.

The reports indicates that in the near term, fiscal consolidation will rest primarily on the efficacy of tax measures already taken by the government and the withdrawal of pandemic-related spending.

Already, the reversal of pandemic-related tax cuts led to improved revenue collection in the second half of the fiscal year ending June 30 2021.

In April 2021, the Kenya Revenue Authority (KRA) surpassed its monthly collection target, for the fifth time in a row.

The taxman collected Sh176.6billion in April against a target of Sh170.1billion 

Moody's observes that the removal of several value-added tax (VAT) exemptions and the introduction of a minimum alternative tax will boost corporate income tax collection, further broadening the tax base.

Kenya intends to reduce the fiscal deficit further by reducing recurrent spending while aiming to prioritise key infrastructure projects, before undertaking further measures to broaden the tax base in later years of the IMF program.

However Moody's notes that Kenya's mixed track record in terms of fiscal consolidation suggests achieving the government's ambitious fiscal consolidation targets over a multi-year timeframe will prove difficult.

These institutional challenges are reflected in the government's monotonous track record in terms of fiscal policy effectiveness, which resulted in a narrowing revenue base and larger-than-budgeted fiscal deficits in three of the past four years.

Taking into account these challenges, Moody's expects the fiscal deficit to narrow gradually, from 8.7 per cent of GDP in fiscal 2021 to 6.8 per cent of GDP by fiscal 2023.

Moodys gave this forecast while affirming Kenya's rating at B2 and maintaining it's negative outlook due to significant risks to the government's current efforts to reduce its fiscal deficit and liquidity risk.

According to Moodys, the Kenyan government has continued with a monotonous track record in delivering fiscal consolidation and achieving revenue targets therefore presenting significant risks to it's fiscal outlook.

“An inability to deliver on planned fiscal consolidation will leave Kenya vulnerable to tightening financing conditions,” Moodys said.

The decision to affirm the B2 rating incorporates Kenya's weak fiscal metrics, as well as considerable governance challenges.

It also takes into account Kenya's fundamental economic strengths including its relatively large and diversified economy with high growth potential, which provides some absorption capacity to economic shocks, as well as its relatively deep domestic financial markets which support domestic, local currency debt issuance.

Moodys notes that the decision to maintain the negative outlook primarily reflects downside risks to the fiscal outlook.