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Kenyan Public Debt Sustainability

Kenyan Public Debt Sustainability

The downgrading of Kenya’s creditworthiness by global rating agency Moody’s in 2018; from B1 (seen as speculative and relatively risky) to B2 (judged to be speculative with a high credit risk) raised fears about the country’s high-risk perception particularly among foreign investors. This risk is underpinned by the country’s high but ‘sustainable’ public debt, currently estimated at more than KES 5.2 trillion (approx. USD 51.8 billion; 52.7% of GDP) in 2018[1]. Of this total public debt, KES 2.6 trillion (approx. USD 24.9 billion) is external of foreign currency denominated debt[2]. Analysts believe Kenya’s rising public debt is a result of heavy investment in infrastructure development that commenced around 2010 in line with the country’s development aspirations underpinned by Vision 2030[3]. Total public debt is currently valued above the East African Community (EAC) gross public debt ceiling of 50.0% of GDP[4]. In the forward-looking medium-term from 2019 to 2021, public debt is projected to increase to an average of 60.1% of GDP[5].

In 2019 Kenya is expected to issue another bond to be denominated in either USD or Euro to the value of USD 2.5 billion[6]. This is in addition to bonds issued in 2014 (USD 2.8 billion) and 2018 (USD 2 billion) which are maturing in 2028 and 2048 respectively[7]. Foreign investors have already placed a risk premium on the country’s international borrowing which will make the planned debt more expensive for tax payers. Kenya is faced with maturing debt obligations and a high import bill due to government-related projects such as the Standard Gauge Railway Phase II. The government’s focus on economic infrastructure and the ‘Big Four’ should enable sustained economic growth and public debt sustainability.

 

 

Kenya’s total public debt increased from an average of 54.2% of GDP from 2015 to 2017, to 63.2% of GDP in 2018[8]. Over the medium-term period from 2019 to 2021, total public debt is projected to moderate to 60.1% of GDP[9]. At these levels public debt exceeds the EAC debt ceiling of 50.0% of GDP but still remains within the domestic threshold of 70.0% of GDP[10]. This means that while Kenya’s debt is growing, its proportion as a share of GDP remains well below its public debt benchmark of 70.0%; making it sustainable.

However, debt-to-GDP ratio analysis is incomplete without analysing analytical conditions of public debt sustainability. Two other critical conditions are debt-servicing costs as a share of total government revenue and effective interest rate compared to real GDP growth. Governments can have unsustainable public debts even if debt-to-GDP is low. This is particularly common when debt-servicing costs are a significant share of total government revenue. When this happens; interest payments compete with other government spending and this usually results in countries defaulting on debt obligations. Governments may also have unsustainable debts with a low debt-to-GDP ratio if effective interest rate on debt is higher than GDP growth rate. This may imply that government debt is increasing while revenue collection remains subdued due to slow economic growth.

For Kenya, real GDP growth rate has remained above the effective interest rate on public debt and this is projected to remain so in the medium to long term. For example, between 2015 and 2017; Kenya’s GDP grew at an average rate of 5.5% compared to an average effective interest rate of 4.1%[11]. In 2018, GDP growth was recorded as 5.7% compared to an effective interest rate of 4.4%[12]. In the forward-looking medium-term from 2019 to 2021, GDP growth is projected to increase to an average of 6.2% while the effective interest rate on public debt projected to increase to an average of 4.8%[13]. This means that Kenya should continue “growing” out of its debt. In other words, Kenya’s economy possesses sufficient means to generate enough returns to service its debt.

As has been pointed out previously, total public debt increased to a record high of 63.2% of GDP in 2018[14]. As a result; the higher level of debt together with rising reliance on non-concessional borrowing has raised fiscal vulnerabilities by increasing interest payments on public debt to nearly a fifth of revenue, placing Kenya in the top quartile among its peers in East Africa. Consequently; Kenya’s risk of debt distress has increased from low to moderate risk even though its public debt remains within a sustainable threshold buoyed by a growing economy and adequate foreign currency reserves.

Interest payments as a share of total government revenue have increased from an average of 9.1% from 2015 to 2017, to 16.2% in 2018[15]. In the forward-looking short and medium-term from 2019 to 2021; interest payments are projected to increase to an average of 21.7% of total government revenue[16]. Hence the government of Kenya is projected to spend approximately a fifth of its budget on debt-servicing.

To reduce its growing public debt burden and maintain sustainable debt levels; Kenya needs to focus on two crucial but complimentary measures. Firstly, Kenya needs to put in place measures to curtail government spending by reinforcing fiscal discipline and enhance its revenue collection by finding mechanisms to tax Kenya’s huge and growing informal sector. Secondly, Kenya needs to urgently curtail public sector corruption by adequately resourcing the Anti-Corruption Commission and appointing individuals with integrity to lead the Commission. Corruption has a tendency of sending wrong signals to both domestic and foreign would-be investors which increases a country’s risk perception. In this regard, President Kenyatta’s renewed pledge to fight corruption is welcome and could be a major confidence booster for the economy.

As a long-term measure, the country needs to improve its productive capabilities by increasing investment in human capital to promote entrepreneurial activity. The current focus on vocational and technical skills training must be encouraged and sustained[17]. This should be accompanied by a shift from exporting raw materials towards local value addition and manufacturing; which in turn will generate much needed foreign currency while also creating jobs.

In conclusion, in the short- to medium-term, Kenya’s public debt is projected to increase marginally although total public debt will remain within the national public debt thresholds in line with the country’s debt ceiling of 70.0% of GDP. Total public debt is projected to average 60.1% of GDP in the short to medium-term from 2019 to 2021. Kenya is unlikely to meet EAC’s debt ceiling of 50.0% of GDP in the medium-term. Short- to medium-term measures need to be put in place to keep debt below the 70.0% of GDP debt mark. However, with an impeding election in 2022; the Jubilee Administration is likely to borrow more to finance the completion of key infrastructure projects in a desperate attempt to grow the economy and lure voters ahead of what promises to be a highly competitive electoral contest. This is a likely political response to calls to speedily fulfil Vision 2030.

 


[1] KNTP 2018a. 2019 Medium Term Debt Management Strategy, Kenyan National Treasury and Planning Ministry: Nairobi. Available At: http://treasury.go.ke/ [Last Accessed: 18 June 2019].

[2] KNTP 2018a. 2019 Medium Term Debt Management Strategy, ibid.

[3] Tshuma, D. and Adogo, H. 2019. History of Conflict and its Impact on Kenyan Development, on the Political Economy Southern Africa Website, viewed on 10 June 2019, from https://politicaleconomy.org.za/.

[4] IMF 2016. Kenya Second Review Under the Standby Arrangement and the Arrangement Under the Standby Credit Facility, International Monetary Fund: Washington, D.C. Available At: https://www.imf.org/ [Last Accessed: 13 June 2019].

[5] KNTP 2019. 2019 Budget Policy Statement, Kenyan National Treasury and Planning Ministry: Nairobi. Available At: http://treasury.go.ke/ [Last Accessed: 18 June 2019].

[6] KNTP 2018b. Annual Public Debt Management Report, Kenyan National Treasury and Planning Ministry: Nairobi. Available At: http://www.treasury.go.ke/ [Last Accessed: 18 June 2019].

[7] Anyanzwa, J. 2019. Kenya Seeks Adviser for Third Sovereign Bond, on The East African Website, viewed on 10 June 2019, from  https://www.theeastafrican.co.ke/.

[8] IMF 2018. Kenya 2018 Article IV Consultation Report, International Monetary Fund: Washington, D.C. Available At: https://www.imf.org/ [Last Accessed: 1 March 2019].

[9] IMF 2018. Kenya 2018 Article IV Consultation Report, ibid.

[10] IMF 2018. Kenya 2018 Article IV Consultation Report, ibid.

[11] KNTP 2019. 2019 Budget Policy Statement, ibid.

[12] IMF 2018. Kenya 2018 Article IV Consultation Report, ibid.

[13] IMF 2018. Kenya 2018 Article IV Consultation Report, ibid.

[14] IMF 2018. Kenya 2018 Article IV Consultation Report, ibid.

[15] IMF 2018. Kenya 2018 Article IV Consultation Report, ibid.

[16] IMF 2018. Kenya 2018 Article IV Consultation Report, ibid.

[17] GoK 2017. Kenya Vision 2030, on the Vision 2030 Website, viewed on 18 May 2019, from http://vision2030.go.ke/.

 

 


Darlington Tshuma

Former Junior Regional Analyst

Darlington Tshuma

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