Putting Kenya’s Public Debt Into Perspective

Kenya’s Public Debt has been on the rise, increasing at a 10-year CAGR of 18.5 percent to Kshs 7.7 trillion in June 2021, from Kshs 1.5 trillion in June 2011.

The rising debt has been brought about by the government’s significant borrowing to fund infrastructural projects and bridge the fiscal deficit that has averaged 7.4% of GDP over the 10 years. The borrowing is both direct by the government and also by guaranteeing state corporations.

The debt mix, as of June 2021 stood at 52:48 external to domestic debt, respectively, compared to 49:51 external to domestic debt in June 2011.

Kenya’s debt stock has increased significantly due to advances from Multilateral lenders such as the International Monetary Fund (IMF) of USD 2.3 bn ( Kshs 256.0 bn) and from the World Bank of USD 750.0 mn (Kshs 82.0 bn), which were used to boost the country’s COVID-19 recovery efforts.

The rise in public debt to new highs has been driven by several factors which include but are not limited to;

1. The fiscal deficit which has averaged 7.4% in the last 10 years and is projected to be at 7.5% of GDP in FY’2021/22 leading to a continuous growth in borrowing and the average borrowing over the 10 years has been Kshs 622.5 bn per annum,  

2. The lower tax collections than projected in the budget. The overall tax collection rate has averaged 96.7% over the last 10 years leading to the government borrowing more to bridge the gap,

3. The guaranteeing of state corporations which have been underperforming leading to the burdening of the government to support them, and,

4. Increased debt servicing costs especially the commercial loans and Eurobonds since they are denominated in US dollars and with the weakening currency, the cost rises. 

Current Debt Levels and Evolution of Debt

The country’s total public debt as of 30^th June 2021 stood at Kshs 7.7 trillion (equivalent to 67.7% of GDP), which is a 14.9% increase from the Kshs 6.7 trillion debt recorded in June 2020 (equivalent to 62.2% of GDP).

Parliament approved increasing the debt ceiling to the absolute figure of Kshs 9.0 trillion from the initial 50.0% of GDP in October 2019, meaning that the government has the headroom to borrow an additional Kshs 1.3 trillion before the current debt ceiling is exceeded.

Since the first reported case of COVID-19 on 13^th March 2020 in Kenya, the total public debt has grown by 22.8% to Kshs 7.7 trillion from Kshs 6.3 trillion.

The debt mix as of June 2021 stood at 52:48 external to domestic debt, respectively, with foreign borrowing at Kshs 4.0 trillion while domestic borrowing stands at Kshs 3.7 trillion.

Banking institutions account for the highest percentage of domestic debt in terms of government securities holdings at 50.8%, but this has been reduced as the exposure by pension schemes has been on the rise.

Debt composition and Evolution:

The country’s debt composition has evolved, with foreign debt increasing at a 10-year CAGR of 18.7% to Kshs 4.0 trillion as of June 2021, compared to Kshs 0.7 trillion in June 2011.

Domestic debt has increased to Kshs 3.7 trillion as of June 2021 compared to 0.7 trillion in June 2011, a 10-year CAGR of 17.1%.

Foreign debt has therefore increased at a faster rate than domestic debt, indicating that the government is turning more to external lenders.

Foreign debt comprises multilateral loans, bilateral loans, and commercial loans. Multilateral loans are debts issued by international institutions such as the World Bank and the IMF to member nations to promote social and economic development while bilateral loans are loan agreements between individual nations.

Multilateral and bilateral loans are categorized as concessional loans due to the favorable terms offered in terms of either below-market interest rates, long grace periods, or a combination of both.

Commercial loans, on the other hand, are loans agreed between a country and an external commercial bank or an external financial debt instrument. Commercial loans typically have higher rates and shorter grace periods.

Kenya’s exposure to bilateral and multilateral loans has been declining in favor of a much more commercial funding structure comprising Eurobonds and syndicated loans (loans provided by a group of lenders who work together to provide funds for a single borrower).

This has seen the proportion of concessional loans (Bilateral and Multilateral debt) which stood at 90.0% of total external debt as of May 2011, decline by 21.5% pointing to approximately 68.5% of total external debt as of May 2021.

Commercial loans, deemed more expensive because of their high-interest costs, have grown at a 10-year CAGR of 45.3% from a low of Kshs 23.8 bn (equivalent to 3.5% of total external debt) as of May 2011, to Kshs 1.0 trillion (equivalent to 27.2% of total external debt) as at May 2021; on the other hand, multilateral loans have grown at a 10-year CAGR of 13.9% in the same period.

Kenya’s debt to GDP ratio came in at 67.5% in June 2021, 17.5% points above the IMF’s recommended threshold of 50.0% for developing countries.

In October 2019, the treasury amended the Public Finance Management (PFM) regulations to substitute the debt ceiling which was previously set at 50.0% of GDP with an absolute figure of Kshs 9.0 trillion to plug the budget shortfalls.

Government debt is forecasted to reach 70.0% of GDP by the end of 2021 on the back of rising debt levels outpacing economic growth.