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17 April, 2023

Debt sustainability has been a critical issue in Sub-Saharan Africa as several countries face a high risk of debt distress. We have seen countries such as Zambia and Ghana having to restructure their debt to avoid a complete default on their loans. Similarly, concerns remain high about Kenya’s debt sustainability as a result of the continued rise in the country’s debt levels, with institutions such as World Bank and the International Monetary Fund (IMF) stressing the need for Kenya to focus on fiscal consolidation. As of December 2022, total public debt stood at Kshs 9.1 tn translating to a debt-to-GDP ratio of 63.0%, 13.0% points above IMF’s recommended threshold of 50.0% for developing countries. Additionally, the debt service to revenue ratio stood at 47.9%, 17.9% points above IMF’s recommended threshold of 30.0%, highlighting how much public debt servicing weighs on the country’s expenditure. Most of the external debt is denominated in USD at 68.1%, and the high depreciation of the shilling has continued to put more pressure on the debt serving; the Kenya shilling has depreciated by 8.9% year following a 9.0% depreciation recorded in 2022.

The country’s debt composition has averaged about 50.0% for domestic and foreign debt. As of December 2022, the proportion of domestic to foreign debt stood at 48.9% to 51.1%, compared to 54.2% to 45.8% in December 2012. The above has been necessitated by the need to balance against suffocating the private sector locally while not getting too much foreign exchange exposure.  The external debt has increased at a higher of 10-year CAGR of 19.0% to Kshs 4.7 tn as of December 2022, from Kshs 0.8 tn in December 2012, while the domestic debt has increased at a lower 10-year CAGR of 16.5% to Kshs 4.5 tn as at December 2022 from Kshs 1.0 tn over the same period. Below is a graph highlighting the trend in the external and domestic debt composition over the last 10 years:


Source: National Treasury and Central Bank of Kenya

The following are some of the factors that have accelerated the growth of Kenya’s Public debt;

  1. Fiscal Deficit – Kenya has witnessed a persistent fiscal deficit averaging at 8.1% of the GDP for the last 10 financial years and is projected to come in at 6.1% of the GDP at the end of FY 2022/2023. This is mainly attributable to the implementation of an expansive budget, with expenditure outweighing the net revenue in any given year. The controller of budget highlights in the Budget Implementation Review Report for H1’2022/2023 that the current approved budget stands at Kshs 4.2 tn against a targeted revenue collection of Kshs 2.1 tn, hence the need to borrow an additional Kshs 1.0 tn  domestically  as well as Kshs 349.3 bn of externally,
  2. Debt Servicing Costs – Debt servicing cost has increased over the years mainly due to the continuous accumulation of external debt. Consequently, the higher cost of debt servicing due to debt obligations, especially in foreign currencies, given the continued weakening shilling, has led to more borrowing as well as higher taxation as the government tries to keep up with its debt obligation,
  3. Shortfalls of Revenue collections– The Kenya Revenue Authority (KRA) has consistently fallen short of its tax revenue targets, which has been complemented by increased borrowing both locally and externally to plug the budget deficits increasing the country’s debt profile over time, and,
  4. Guaranteed loans by the Government of Kenya – The total state corporations guaranteed loans by the government as of December 2022 was Kshs 164.6 bn. Such guaranteed loans put pressure on the need for excessive spending, despite poor performances by the state corporation, resulting in borrowing to finance the loans.

The country’s risk of debt distress is extremely high, as evidenced by the high debt service-to-revenue ratio and debt-to-GDP ratio, which are above IMF’s recommended thresholds for developing countries. Further, the recent downgrades by both Fitch and S&P credit agencies on the back of tightened liquidity and surging debt profiles affirm concerns that the level of borrowing needs a fresh relook. Consequently, we note that the growth of Public Debt at a 10-year CAGR of 17.7% to Kshs 9.1 tn in December 2022 has outpaced economic growth that has averaged at 4.5% for the last 10 years, with the International Monetary Fund (IMF) expecting Kenya’s 2022 GDP growth to come in at 5.4%. This points towards a high risk of debt distress as revenue alone might not be sufficient to service the accumulated public debt. The fiscal deficits resulting from the revenue-expenditure mismatch have also presented an ever-present challenge in fiscal consolidation as revenue continues to lag behind expenditure. As such, below are some actionable steps that the government can take to reduce the debt overhang as well as mitigate the risk of debt distress;

  1. Enhance Fiscal Consolidation – High fiscal deficit is attributable to higher growth in expenditure volumes relative to revenue collections, creating the need for excessive borrowing levels. The government needs to implement robust fiscal consolidation through expenditure reduction by introducing austerity measures and limiting capital expenditure to projects with either high social impact or have a high Economic Rate of Return (ERR), and high economic benefits outweighing costs,
  2. Promote Capital Markets - The government should channel efforts towards strengthening the Capital Markets structure to ease the pooling of funds by investors to undertake development projects. Key to note, Kenya’s capital market remains underfunded and overshadowed with banking markets having mobilized Kshs 4.4 tn in deposits compared to Collective Investment Schemes at only Kshs 0.2 tn as of September 2022, hence the need to increase support to the sector,
  3. Reduce the recurrent expenditure - Currently, the mix of recurrent to development expenditure in Kenya is 76:24 as of December 2022. There is a need to reduce the portion of recurrent expenditure, which majorly encompasses public wages. This will, in effect, reduce the overall expenditure basket, freeing up the debt level.
  4.  Improving the Country’s Exports – The government should formulate export and manufacturing favorable policies to improve the current account. This would stabilize the exchange rate and stop our foreign-denominated debt from increasing as the shilling depreciates,
  5. Implementation of Private Public Partnerships (PPPs) – The government should fully implement Private Public Partnerships (PPPs) and joint ventures to attract more private-sector involvement in funding development projects such as infrastructure and thus reduce the need for borrowing.
  6. Better governance and accountability – Better governance will help to reduce wastage and corruption levels that had impeded the proper allocation of funds towards designated projects, resulting in misappropriation of funds and,
  7. Privatization of State Parastatals - The government should privatize poorly performing parastatals, as discussed in our Cytonn Weekly #12/2023 to release capital, lower debt, and also to prevent the widening of debt from losses and inefficiencies.

For detailed analysis, please see our report on Kenya’s Public Debt 2023, & Cytonn Weekly #15/2023.