A Look at Kenya’s Public Debt Sustainability

Kenya’s rising public debt profile remains a significant concern among many investors and key stakeholders. These include the government, financial institutions such as banks, and the Kenyan general population.

The portfolio of Kenyan debt has shifted from domestic borrowing to external funding. This means that Kenya has recently borrowed more from the international market than the local one, involving banks and individual investors.

Due to the huge demand for financial obligations to service by the Kenyan government, in many instances, it has opted for external borrowing because the local borrowing has not generated the much-needed funds.

The unfortunate instance of such action is that external borrowing has proven to be more expensive commercially in Kenya than the local one, which is relatively cheaper concessional.

Data from the Central Bank, World Bank, and the Kenya National Bureau of Statistics show a sharp rise in public debt since 2013. This coincides with a change in the political regime which is perceived to have had an appetite for more borrowing.

The latest data from the Kenyan National Treasury as of May 2022 indicate an external to domestic debt ratio of 50.2% to 49.8%. It simply means that we borrowed more externally than locally as a country.

Government Expenditure vs Revenue Collection

Kenya’s government expenditure has risen faster than it collects in revenue. An analysis of national accounts data indicates that the deficit directly results from recurrent government expenditure growing more quickly than revenues.

For instance, recurrent expenditure accounts for 65.3% of total government expenditure in the financial year 2021/22.

The regime from 2013 set very ambitious revenue targets, which they did not meet as of June 2022. The challenges to meeting the budget deficit were evident when the Kenyan National Assembly or parliament raised the debt ceiling from Kshs 9 trillion to Kshs.10 trillion in June 2022, initially at 8.6 trillion.

At the current growth pace, it is anticipated that the new ceiling will be breached by the year 2023/24.

Kenya’s Public Debt Presently Exceeds Sustainability Thresholds

At the end of May 2022, Kenya’s total public debt stood at Kshs 8.6 trillion. This represented 69.1% of the country’s earnings or Gross Domestic Product (GDP).

This percentage goes to debt repayment, with only 30.9% left as debt-free national cash. According to the joint IMF-World Bank debt sustainability analysis (DSA) report (PDF), the effects of the Covid-19 pandemic moved Kenya’s debt distress from moderate to high. This means that soon, the debt will likely breach the threshold.

To bring back the debt to sustainable levels, there is an urgent need for debt restructuring.

Is Kenya’s Public Debt Sustainable?

The National treasury lacks a medium-term revenue collection strategy to improve its collections. The government has also not demonstrated enough of its commitment to reducing recurrent expenditures like reducing public wage expenses.

Furthermore, with ever-increasing government expenditure coupled with rampant cases of mismanagement of public funds through corruption, Kenya’s debt sustainability efforts face a significant challenge.

However, despite the attractive coupon rates that currently float with bonds, investors should exercise speculative actions as they observe the financial behavior of the incoming regime.

Final Note

In summary, the Kenyan government has over-borrowed both internally and externally. However, despite being highly exposed, it’s not in the red yet.

World Bank or IMF has not declared the Kenyan government bankrupt. It’s still in a position to manage its debt portfolio. Investors are encouraged to continue trading with the Kenyan government through bond trade.