Friday, July 9, 2021

By Wandeda Dickson, University of Nairobi, School of Economics

Kenya’s overall public debt increased from 48.6% of GDP at the end of 2015 to an estimated 69% of GDP at the end of 2020[1]. As of September 2020, Kenya's external public debt was 51.4% of its total debt stock of 7.1 trillion Kenya Shillings[2].The International Monetary Fund recommends that ratios of public debt to GDP not exceeding 40% for developing countries[3]. The ballooning public debt has been partly driven by large spending on infrastructure projects and by the COVID-19 global shock in 2020. External debt is not necessarily harmful for an economy. Studies show that external debt inflows can stabilise the economy and boost economic growth. However, interest and principal repayments on external debt are made in foreign currency. This depletes a country’s foreign exchange reserves and may depreciate the domestic currency. The relatively high level of Kenya’s external indebtedness and rising debt burden has serious implications on the country’s development and debt sustainability initiatives. This is because several risks are associated with high debt levels: higher taxation, depreciation of local currency, increased cost of further borrowing, high cost of debt servicing, and crowding out of private sector.

Kenya government has proposed a number of debt management strategies. The public debt management objectives as outlined in Section 62(3) of the Public Finance Management Act (PFM), 2012[4] consist of: (a) minimizing the cost of public debt management and borrowing over the long-term taking risks into account; (b) promoting the development of the market institutions for Government debt securities; and (c) ensuring the sharing of the benefits and costs of public debt between the current and future generations. There is need for Kenya government to further adopt mix of borrowing instruments that is aligned to the 2021 Medium Term Development Strategies objectives. Specifically, (a) consider treasury bonds of medium to long term tenor as a financing instrument for domestic market[5]and (b) move further toward more concessional external debt to reduce the amounts paid in debt service.

 


[1]IMF 2021
[2] Kenya Annual Public Debt Management Report, 2020
[3] IMF (2010). From Stimulus to Consolidation: Revenue and Expenditure Policies in Advanced and Emerging Economies. Fiscal Affairs Department April 30.
[4] 2021 Medium Term Debt Management Strategy. The National Treasury and Planning-Republic of Kenya
[5] 2021 Medium Term Debt Management Strategy. The National Treasury and Planning-Republic of Kenya
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