By David Mwere, NAIROBI Kenya
China is the biggest bilateral contributor to Kenya’s Sh8.6 trillion public debt, with the International Development Association (IDA) topping the list of multilateral lenders.
This comes as data from the
Parliamentary Budget Office (PBO) indicates that Kenya’s debt stock is
projected to hit Sh9.8 trillion by June next year as the country’s insatiable
hunger to borrow more is expected to remain unchanged with the coming in of the
new administration.
It, therefore, leaves the
government with the room to only borrow Sh200 billion to finance the fiscal
deficit in the 2023/24 budget after Parliament in June capped the country’s
debt ceiling at Sh10 trillion.
Alternatively, the government
may decide to violate the debt ceiling by borrowing beyond the limit without
amending the law.
The country’s current debt
stock includes Sh4.268 billion in domestic borrowing with foreign debts
accounting for Sh4.295 billion.
It accounts for 68 per cent of
Kenya’s Gross Domestic Product (GDP), which is way above the recommended 55 per
cent or below.
Data from PBO, which advises
Parliament and its committees on fiscal matters, indicates that China’s lending
to Kenya stands at Sh796.5 billion, with the other bilateral lenders sharing
Sh311 billion.
At Sh1.2 trillion, IDA tops
the multilateral lenders followed by African Development Bank (ADB) at Sh383.2
billion, the International Monetary Fund (IMF) at Sh207.2 billion and others
sharing Sh117 billion.
Debts procured from multilateral markets are cheaper as they attract lower interest rates compared to bilateral and commercial loans.
Sovereign bonds accounted for
Sh828.9 billion in commercial debts to the country followed by banks at Sh281.3
billion, supplier credits at Sh12.2 billion with guaranteed debt at Sh158.9
billion.
Guaranteed debts are loans
procured by State Owned Enterprises (SOEs) using the government as the
guarantor, meaning that the government inherits these debts in the event they
are unable to repay.
“Given the prevailing debt
accumulation and debt service trends, the current debt ceiling cannot hold.
Therefore, it may be subject to review in order to accommodate any further
borrowing to fund expenditure requirements,” the PBO document on this year’s
budget, reads.
The drivers of public debt
have been expenditure decisions by government agencies, interest and exchange
rates, and economic growth. This means increased borrowing whenever there is a
shortfall in revenue.
In the Sh3.3 trillion budget
for the 2021/22 financial year, the government committed Sh1.1 trillion in debt
servicing.
However, PBO says that debt
servicing is projected to hit Sh1.36 trillion by the end of the 2022/23
financial year and will account for up to 10 per cent of the GDP by the end of
the medium term.
“At this level, it will have
outpaced the development expenditure share of GDP, which is five per cent, and
will be rising faster than recurrent expenditure share of GDP, estimated to
decline to 10.8 per cent in the current financial year,” the PBO document
reads.
Empirical evidence gathered by
the budget office suggests that a high debt-to-GDP ratio has a detrimental
effect on the growth rate of an economy.
The PBO document shows that
past a given critical point — for instance between 64 per cent and 100 per cent
depending on the nature of the economy — an increase in the ratio leads to
economic losses.
“The debt-to-GDP ratio should,
thus, not be allowed to reach levels that would affect the economic growth rate
negatively as this would lengthen the fiscal consolidation period,” the budget
office document says.
To wiggle out, the budget
office says that the government will require fiscal consolidation.
This includes achieving the 10
per cent economic growth rate projected in the economic pillar of Vision 2030,
a key target in debt control parameters.
The experts further say that
the primary focus should, therefore, be given to sectors that are critical to
revenue generation — manufacturing, finance and insurance, and information and
communication technology, “as this will accelerate the fiscal consolidation
process.”
The persistent rise in the
fiscal deficit has been linked to rapid public debt accumulation.
The budget experts project
that the overall fiscal deficit will persist due to infrastructure-related
expenditure pressures, the increase in debt servicing expenditures alongside
other critical expenditures such as the economic stimulus programme and the
implementation of a new manifesto by the new administration.
“This is expected to play a
greater role in the stickiness of the fiscal deficit over the medium term. Thus,
the public debt stock is likely to increase even further in the coming years.”
But even as this happens, PBO
says that fiscal discipline and commitment to an efficient implementation of
the budget by both national and sub-national entities could lead to higher
economic growth, thereby increasing revenue and reducing the need to borrow.
The experts say that
controlling debt service will require restructuring of domestic debt and that
debt service, which is a mandatory expense, is estimated to account for over 60
per cent of ordinary revenue, thereby reducing resources available for other
“critical expenditures”.
Domestic debt service accounts
for 74 per cent of total public debt service even though it accounts for only
48 per cent of total debt stock.
While external debt accounts
for 52 per cent of total debt stock, it accounts for only 26 per cent of debt
service.
This implies that domestic
debt restructuring will have a greater impact on alleviating the debt-service
burden.
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