Kenya’s High Debt Level Threat To Development Agenda

Kenya’s ambitions of achieving its development agenda might be jeopardized by the high debt level and the deteriorating macroeconomic operating environment, a new report has revealed.

According to the Institute of Public Finance (IPF) latest Macro Fiscal Analytical Snapshot Report, Kenya finds itself in a tight spot following years of successive borrowing, coupled with the inability of the private sector to create sufficient jobs for millions of young people entering the job market annually.

The report reveals that since 2014, persistent high fiscal deficits have resulted in a swift escalation of public debt, now standing at 70 per cent of the Gross Domestic Product (GDP).

Speaking during the official launch of the report, IPF Chief Executive Officer (CEO) James Muraguri noted that for Kenya to maintain robust economic growth, it must put in place the necessary fiscal levers to promote faster private-sector-driven growth.

“Revenue optimism has been a persistent problem in Kenya for several years which in the past has tended to result in higher-than-planned fiscal deficits financed by additional borrowing,” said Muraguri.

“More recently, rising global interest rates and a subsequent decline in inward foreign investments have caused the Kenyan shilling to depreciate steeply, significantly increasing the cost of external debt servicing and further putting pressure on Kenya’s foreign exchange reserves,” he added.

The recent depreciation of the Kenyan shilling against the US dollar hitting an all-time low of 160 against the dollar signifies a downgrade in the country’s economic outlook.

Furthermore, the elevated risk of debt distress as highlighted by the International Monetary Fund (IMF) poses challenges in effectively managing external debt servicing.

Other impediments include Kenya’s vulnerability to climate shocks such as drought and floods which may derail growth over the long-term.

“Revenue optimism has been a persistent problem in Kenya for several years which in the past has tended to result in higher-than-planned fiscal deficits financed by additional borrowing,” said IPF boss Muraguri.

“More recently, rising global interest rates and a subsequent decline in inward foreign investments have caused the Kenyan shilling to depreciate steeply, significantly increasing the cost of external debt servicing and further putting pressure on Kenya’s foreign exchange reserves.”

Just like its peers in the continent, growth in Kenya has been led by non-tradeable services and exports have halved as a share of GDP, whereas external debts have increased.

Kenya’s external debt service as a proportion of exports is significantly above the level that the IMF considers sustainable for a country such as Kenya Even if the IMF reclassified Kenya as a country with “high” debt-carrying capacity, it would still be in breach of the upper limit until at least 2027.

On the expenditure side, fiscal consolidation in the past two years has led to a decline in real per capita spending, impacting development and fiscal transfers to counties.

Devolved units in the country heavily rely on national fiscal grants, constituting 91 per cent of expenditures, with limited own-source revenue (OSR) at 9 per cent.

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