Is Kenya’s Debt Appetite Cause for Concern?

In Summary

• Current headlines driving the public narrative on Kenya’s public debt paint a very worrying picture.

• Kenya’s public debt, as of 31 December 2018, stood at Sh5.27 trillion. This represents a debt to GDP ratio of 57.1 per cent.

Uhuru China Trip
Uhuru China Trip

‘Too much debt! Looming Debt Crisis! Public Debt a National Disaster!’ – current headlines driving the public narrative on Kenya’s public debt paint a very worrying picture, that Kenya’s finances are in turmoil. With the successful issuance of Eurobond III, valued at $2.1 billion, as well as increased government expenditure, the average Mwananchi must be stressed beyond measure at Kenya’s debt picture. Add that to the conception that public debt directly equates to unbearable financial burdens on the children of tomorrow, and everyone should indeed be running for the hills. I propose, however, that it is not all doom and gloom.

Let us pause for a minute and catch our breath, following which we can objectively analyse Kenya’s public debt. Per official debt data, Kenya’s public debt, as of 31 December 2018, stood at Sh5.27 trillion. This represents a debt to GDP ratio of 57.1 per cent. Critics note that this debt to GDP ratio is far too high, particularly considering the ‘optimal’ debt to GDP ratio for developing and emerging economies set at 40 per cent (60 per cent for developed and advanced economies). Critics further argue that past the stated threshold, the increased debt to GDP threshold is likely to cause macroeconomic instability, which is not good for growth and ultimately makes the debt unsustainable.

However, despite the above, a recent IMF report notes that the correlation between high debt and macroeconomic instability is not as obvious as once was. Particularly, the 2010 study notes that while increased debt may have a negative impact on growth, the impact is only minute. The report proceeds to note that this negative impact is easily reversed and overwhelmed by increased public spending on growth-promoting investments such as infrastructure investments. The key point here is that rather than focus on the aggregate value of the Kenya’s public debt, focus is best placed on the composition of public debt.

It is widely accepted that public debt, when correctly utilised, is a benefit, rather than a burden. It is through public debt that developmental targets are achieved. However, for the benefits of public debt to be actualised, it is essential that public debt is managed efficiently, utilised appropriately, and supported by principals of transparency and accountability. On the management side, it falls on the relevant governmental institutions to ensure that public debt is within levels that are supported by the economy. This involves considering the country’s expected economic growth, fiscal capacity, and default risk, among other factors.

The challenge is to ensure that public debt translates to growth promoting investments, such as the ongoing SGR, LAPSET and highway development projects, which often do not come cheap. This will ensure that increasing debt obligations are appropriately balanced, or indeed surpassed, by year on year GDP growth.

Karen Kandie – MD IDB Capital