WHAT YOU NEED ABOUT KENYA'S PUBLIC DEBT CRISIS
In my inaugural article on this blog on the fall of third quarter of previous financial year, I stated my worries on the public debt crisis which is seriously plaguing our country, don’t’ worry, my worries still persist. That persisting nature of the crisis has continued to spark a raging public discourse on how regimes in the past and in the now have failed in prudent debt management to such an extent it exist as hindrance to, instead of being an enabler of country’s development. In fact, the mystery of public debt is one of the major issues that enraged the public during the June 2024 #Occupy protests. In agreement, experts, banking sector, debt management practioners and the public endorse the belief that public debt is not actually undesirable to any extent however what really matter is how it is being exploited for the interest of public good. Most first world countries whose economies have peaked the economic maturity stage have tremendous levels of public debt, exemplifying casing points are the US with a federal debt of $35.2Tr, and China's $12.5Tr, and United Kingdom having £2.8Tr among many others. So, on the face of it, cosmic public debt doesn’t have direct correlation with sluggish economic development. In recent debt data produced by public debt management office, it is evident that for Kenya’s case, the country is not on the right trajectory in regards to public debt control.
To understand deeply, the current fiscal policy is currently focussed on implementing a five year medium Term Debt Strategy that aims to resolves the following;
—Progressively
lessen annually widening fiscal deficit.
—Sluggish
the growth of Public debt.
—Reduce
the debt obligations by repaying radically, as per BETA’s ambition.
—Shying
away from external debt mobilization.
—Induce
stability of domestic debt market with an aim of resorting to domestic debt in
the long-term.
—MTDS
2023, which guides annual borrowing plans till 2028, aims at maximize
concessional borrowing while rolling over commercial debt from external source.
—Whereas
on domestic front, extend the maturity and deepen domestic market through
issuance of medium to long-term benchmark Treasury bond.
—Undertake
domestic debt market reforms such as liability management operations through
debt swaps and other innovative solution with aim to avoid external commercial
loans.
—And effectively implement the MTDS 2023/2024-2027/2028.
Despite the economy stabilizing in its growth in recent months, upward leaps of the following macroeconomic indicators indicates that fiscal policy aims are largely off-track according to the Annual Public debt report 2023-2024, which was released during the month of November 2024(APDR2024)
Debt
to GDP ratio
For most of third world countries, debt to GDP ratio is fundamentally significant in telling whether public debt of a country is sustainable or not. The Debt/GDP ratio of Kenya has sky-rocketed since the lapse of grand coalition government. In annual public debt report 2022-2023, Kenya’s debt GDP ratio was at 72.0%, this had surpassed the IMF threshold of 50.0%. Although the ratio have reduced to 65.2% as per the public debt report 2023-2024, it is still way higher than the threshold by over 15%. The drop in the ratio recorded in the previous financial year-2023-2024, was majorly driven by the dramatic appreciation of the Kenyan shilling since the beginning of quarter 4 of FY 2023-2024 till date. Further, over the medium term, this indicator is projected to decline further to 54% in 2027/2028 as total debt is forecasted to increase from the current Kshs. 10.5B to Kshs. 13.5B in 2027/2028.
Debt
service revenue ration.
Debt servicing in respect to total revenue collected (the repayment of debt) has increased to 69% from last years’ 58.8%, pushing further away from the IMF recommended threshold of 30% by almost 40%. The ratio is basically the share of revenues collected committed to repayment of outstanding debt. One of major current’s fiscal policy aim for the medium term is to hugely repay the debt in order to relieve the economy from the gigantic debt burden. The country commits nearly 70% of it's annual revenues to offset its outstanding loans leaving only 30% of annual revenues for both recurrent and development expenditures. According to public debt report 2024, the country increased its debt service commitment by 30%. Debt service for external obligations increased by 87.9% this is majorly due to the maturity of $2B dollar Eurobond as domestic servicing maintained a steady growth of 0.5% within the period under review. Further, interest payment on debt rose to 5.6% of GDP deviating from a target of 4.4%
Appetite
disparity for Domestic debt against External debt
Kenya has almost in equal measures traditionally relied both on external and domestic markets for its resource mobilization targets. However, for this last financial years the country has recorded overreliance of domestic market to mobilize its resources for its development plans. During the period under review, domestic debt and external debt ratio was 73:27 as at June 2024. This is in line with the government medium term plan to reduce reliance on the external debt since it has increasingly become unsustainable to offset them. The unsustainability is majorly due to exposure to foreign exchange risks, which occasionally manifest when the Kenyan Shilling depreciate against the US Dollar. Also, another reason behind the wide disparity between external and domestic debt is tight access for global credit. Kenya currently is in the list of those countries classed as facing high risk of debt distress, it nearly ended up in Ethiopia’s tough debt situation of defaulting on its $33million coupon payment of its $1B Eurobond. Kenya fears of a looming default in its debt servicing of external debt and in order in avoid the Ethiopia’s, Ghana’s and many other country’s fate of default, it has reoriented its fiscal policy focus on strengthening its domestic debt markets.
Traditionally, conventional domestic debt comprise of Treasury bills and bonds, Central Bank of Kenya Overdraft advanced to Government, pre-1997 CBK debt, bank advances from commercial banks and CBK on lent loans to Government(IMF SDR allocation to Kenya. The stock of domestic rose by 12.0 % which is by kshs. 577.9B from June 2023, this was majorly because of drastic growth of Treasury bond for government deficit financing during that particular fiscal year. The government continues to push for the domestic debt market reforms with a view to boost its reliance on domestic markets while avoiding external resource mobilization, external debt.
Economic growth.
Medium Term Plan IV aligned with Bottom-up Economic Transformative Agenda aimed to make a turn around on the economic growth of the country. The MTPIV was ideally an economic recovery strategy following Covid 19 pandemic which destroyed the economy like other countries and added to it is BETA which is the economic agenda of the current government party. The economy has since recovered in a stable momentum recording growth of 5.6% as at June 2024. Additionally, fiscal forecasts projects stability to continue in the current FY 2024-2025 after the economy recorded a stable growth of 5.0% in the first quarter. Expansion of the economy is attributed to variety of factors, but two major one are;
- Stability of Kenyan Shilling against the US Dollar.
From the middle of third quarter of previous FY 23/24, the local currency registered rise in value which stabilized at Kshs. 129 per 1$ since June, a leap from an unprecedented low of Kshs.164 per 1$. The appreciation was largely attributed to buyback transactions of $1.5B of Eurobond that was slated to mature on June 2024. Appreciation of Kenyan shilling is fundamentally significant in stimulating economic growth since Kenya is majorly an importer country that relies on importing raw materials and oil for its industry to function. Essentially, as local currency appreciates, it is cheaper to buy the US dollar which is the largely preferred currency for trade in the global market which then makes purchase of imported goods and products in the international trade more accessible and vice versa.
-
The
recuperation of Agriculture and Service sectors
In a performance report by the apex bank –CBK named Central Bank of Kenya Bank Supervision Annual Report 2023, the agricultural sector registered strong growth of 6.5% in FY 2023-2024 up from 4.9% in 2022. Additionally, service sectors such as tourism, banking and transport maintained a stable growth. Overall, the economy improved by 5.6% up from 4.9% in 2022 signalling hopes in achieving Micro/Macroeconomic targets in subsequent quarters. Importantly, the direct relationship between economic growth and public debt level is key in understanding the sustainability of debt offsetting in the medium term. As public debt continues to soar, and becoming unsustainable, expansion of economy offer good news as though not adequate.
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