The International Monetary Fund has called on Kenya to be more cautious about building debt, with the government having recently doubled its debt ceiling to match the entire economy.
“We do advise Kenya to be somewhat more cautious in the building of debt,” IMF managing director Kristalina Georgieva said on Wednesday. “Our programme with the country and our engagement with the country, by and large, are just as positive.”
At the beginning of the month, the Senate approved Treasury's request to raise the public debt ceiling to Sh9 trillion between over the next three financial years.
This was after the National Treasury proposed to place a ceiling on public debt at an absolute figure of Sh9.1 trillion, a departure from the 50 per cent to GDP threshold the government the state has continuously failed to achieve.
Data by the Central Bank shows Kenya’s total public debt currently stands at Sh6.2 trillion translating to 60 per cent of the country’s GDP valued at Sh8.79 trillion.
This while the Kenya revenue authority misses its revenue targets year-in-year-out. In the 2018/19 financial year alone, KRA missed its collection target by a whopping sh250 billion, raking in Sh1.44 trillion against a target of sh1.69 trillion.
Last week, Treasury CS Ukur Yatani raised concerns about the growing public debt, admitting for the first time that the country is borrowing beyond its means.
Despite Kenya’s high debt levels, Georgieva said Kenya had good macroeconomic policies adding that increased investment seen in the country would pay off the debt over time.
“We have seen good macroeconomic policies in Kenya,” Georgieva said.
Since its introduction in September 2016, the IMF and World Bank continuously pushed for a review of the Banking (Amendment) Act, 2016 which capped loan charges at four per cent above the prevailing 10 per cent Central Bank Rate.
In its working paper ‘Do Interest Rate Controls Work? Evidence from Kenya released in June, IMF said the legislation aimed at reducing the cost of borrowing, expanding access to credit, and increasing the return on savings had the opposite effect.
The IMF even used modification or a complete overhaul of the law as a precondition for the renewal of a Sh150 billion standby facility that expired last August.
This means, with the rate cap law gone, there may be hope for the country to finally gain access to the precautionary loan used to cushion Kenya’s currency from external shocks.
Last year, IMF downgraded Kenya's debt distress from low to moderate, indicating that the country's default risk had grown.
IMF is now worried about rising debt in Africa, with about 40 per cent of countries on the continent at distressed levels.
“In some cases, we are concerned, in others, we see that investing is going to pay off over time,” Georgieva said.
