Kenya’s Debt Sustainability: Is Country on the Right Track?

There has been a lot of discussion on whether Kenya as a country is able to sustain the current debt levels and as to whether the economy has the capacity to service the outstanding government debt.  Is Kenya on the right way in case of debt sustainability?

Over the years, the national budget continues to grow with the total expenditures growing at an average of 15.4 percent to 2 trillion shillings in 2015/16 from 977.0 billion shillings in 2010/11, while revenue growth (KRA Tax collections) has increased by 14.2 percent to 1.3 trillion shillings in 2015/16 from 670.0 billion shillings in 2010/11 meaning that the difference has been funded through borrowing.

This has led to an increase in the debt level from 40.7 percent debt to GDP in 2011 to the current level of 50.3 percent. According to the International Monetary Fund, the target debt to GDP for developing countries should be at or below 50 percent, meaning that the current debt level in the country has surpassed the standard set by the global lender, and this may pose fiscal challenges if mechanisms are not put in place to improve on Kenya’s fiscal and public finance management framework.

There are two avenues that the government can use for borrowing, either from the domestic markets through issuance of treasury bills and bonds, or can seek to borrow from the international markets through direct government-to-government negotiations or from the international capital markets through the issuance of sovereign bonds/Eurobonds.

Raising funds from the domestic market is much easier and faster and there is already a defined time table for this i.e. weekly through treasury bills and monthly through treasury bonds and for this, the Central Bank acts as the borrowing agent of the Treasury.

Local borrowing is also advantageous as it is faster and simple to administrate, but the main issue is that government competes with the private sector for funds from banks which leads to crowding out of private sector and slowdown in economic growth as the contribution by the private sector to economic growth reduces.

On the foreign borrowing, though it gives the government another borrowing avenue apart from the domestic market, the challenge is that it opens up the country to trends in the global market, which may destabilize the economy in times of global crisis.

According to the Central Bank of Kenya, the country debt mix currently stands at 50:50 for external and domestic debt at 1.8 trillion shillings each, bringing the total debt to 3.6 trillion.

The bulk of the government’s foreign borrowings is through bilateral agreements as only 270.0 billion shillings was issued in the 5 and 10 year Eurobonds. From the last budget, the split in the local and foreign borrowing was at 42.6 and 56.9 percent, respectively and this has now been revised as per the Budget outlook paper to 49.4 and 50.6 percent, respectively.

The ability to service debt is key and is usually measured by revenue collection to total outstanding payments required, both in principal and interest payment. The government at times borrows to pay off their debt but usually ability to pay off the debt with revenue collections would be ideal.

For the current fiscal year, the total allocation to debt servicing was 250.0 billion shillings and has increased from 173.3 billion in 2011, a growth rate of 44.3 percent over the last five years.

According to a report on Division of Revenue Bill by the Treasury, the government is expected to utilize 40.0 percent of tax revenue collection for debt repayments in 2017, up from 32.0 percent in the current fiscal year 2016/17.

Looking at the current debt levels, the main issue is that if the current trend continues, the economy is likely to face fiscal challenges which may further affect negatively Kenya’s credit ratings in the international market.

In order to address this, Kenya need first to look at the factors that has led to the acceleration in government borrowing over the last three years;

• Slow growth in revenue collection compared to the budget growth: The revenue growth has averaged 14.2% over the last five years while budget growth has been at 15.4% over the same period resulting into more borrowings to fund the budget deficit,
• Significant investment in infrastructure projects: Though investment in infrastructure will eventually result in an increase in economic activity, it will take time for the economy to start benefitting from such investments,
• Misalignment of Fiscal and Monetary Policy decisions: The government continues to borrow money from the market at high rates despite the initiatives being in place to achieve a low interest rate environment.

(99 Percent of the material in this Text were extracted directly from Cytonn Investments Report of 11th December 2016)