The Parliamentary Budget Office has warned that the high accumulation of public debt will affect Kenya's economic growth.
As at March 2016, the national outstanding debt stood at Sh3.312 trillion.
The PBO in its 2016/ 27 'Budget watch' report notes the debt is expected to increase as the country borrows heavily to finance key infrastructural projects including the standard gauge railway.
“The increase is already having an effect on growth rates of the country through limiting the achievement of maximum growth rates given the existing resource base due to huge amounts of outstanding debt,” the report says.
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The PBO cites studies done by the International Monetary Fund in 2013 that show large public debt can effectively lower Gross Domestic Product (GDP) while making fiscal expenditure vulnerable to shocks.
This year, the middle term debt strategy paper indicates that the government will pursue 60 per cent external and 40 per cent domestic borrowing.
The report tabled in the National Assembly says this trend limits the government's ability to engage in counter cyclical policies, increasing the primary surplus needed to stabilise the debt ratio and adverse shocks to interest rates.
“The challenge therefore lies in maximising on the link between debt accumulation and benefits that will accrue from addressing infrastructural gaps,” the report says.
But the report notes positive externalities. The increase in external debt was tied to financing the SGR from Mombasa to Nairobi and finally to Busia with the projection of extending to Uganda, Rwanda and Democratic Republic of Congo.
The SGR and other major infrastructural projects are financed through loan facilities from China and partners including the African Development Bank and the International Development Assistance.
The borrowing, according to the report, has increased interest related payables to be incurred every financial year.
For instance, Chinese interest-related cost accounts payables in 2016/17 stand at Sh16.2 billion. This accounts for up to 30 per cent of the total interest costs to be incurred during the same period.
“The interest-related costs are therefore not expected to plummet and will rise with the ratio of projected external debt uptake as stipulated in the middle term expenditure framework plan," the report says.
It also notes that the high interest rates could also be influenced by risks such as exchange rate risk.