Debt burden on expensive loans leaves Kenya in a financial mess

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.