DISTRESS

Kenya's piling debt poses a default risk – experts

Borrowing expected to hit the Sh9 trillion ceiling in two years.

In Summary

•The country’s debt currently stands at Sh7.1 trillion–Sh3.66 trillion (external) and Sh3.40 trillion (domestic).

•Experts say the rate of borrowing is too high, calling on the government to slow down.

Kenya risks defaulting on its currently at Sh7 trillion, experts have warned, as the government targets to borrow Sh1 trillion in the current financial year.

This is on falling domestic revenues against a high debt repayment level and subdued economic growth, making it difficult to meet debt obligations.

The weakening of the shilling against the dollar, which has gained about Sh8 to the local currency, and other major currencies, has also pushed debt higher mainly on commercial loans.

 

The country’s debt currently stands at Sh7.1 trillion–Sh3.66 trillion (external) and Sh3.40 trillion (domestic), the latest Central Bank of Kenya data shows.

However National Treasury CS Ukur Yatani has maintained that the country is not under debt distress, the latest being last month during a grant signing event with Japan.

Though he noted revenues have been affected by Covid-19, which has hit the different sectors of the economy, the CS said the country has legroom to borrow, adding that Kenya has never defaulted on any loan in history.

"Kenya's debt is sustainable, we are not feeling any distress,” Yatani said.

A revenue shortfall worsened by the Covid-19 pandemic, has pushed the government to borrow to refinance debt and fund recurrent expenditure, which experts term a “risky move.”

“We are paying more than we are making. That is risky,” International Budget Partnership (IBP) Kenya, country manager, Abraham Rugo said.

IBP Kenya has since cautioned on the fast growing debt more so conditional loans that could come back to haunt the country, including repossession of key assets or depletion of forex reserves.

Financial Risk Analyst Mihr Thakar yesterday noted that Kenya's debt is now above 70 per cent of GDP.

“What is more worrying is the growth rate of debt. If the economy contracts while the country's debt load increases by 15 per cent, that is clearly unsustainable,” Thakar said.

Treasury has been piling up debt each year by a double-digit percentage, he noted, while the economy has been growing at just over five per cent in normal times.

 

“They borrowed in a manner that there would be no crisis. And then boom, we get hit with a once in a century pandemic,” Thakar posed.

Yesterday, the Institute of Public Finance (IPF), which has also termed Kenya’s debt ‘unsustainable’ in the long term, called on the government to slow down on heavy borrowing for infrastructure and cut on its recurrent expenditure to ease the debt burden.

“The speed of accumulating debt is worrying. The government should slow down on mega projects,” IPF(Kenya) CEO and founder James Muraguri said.

Since coming into power, the jubilee government has borrowed heavily mainly for infrastructure development, including the SGR and roads, which has seen public debt swell from the then Sh1.6 trillion.

Parts of these loans have however ended up in recurrent expenditure, as revenue collection remained low, amid high annual budget plans.

The National Treasury has prepared a revised Sh2.92 trillion 2020-21 supplementary budget for approval by the National Assembly after raising budget estimates for the year from Sh2.79 trillion.

Recurrent expenditure is expected to increase by about Sh17 billion to Sh1.844 trillion, against revenue targets (revised) of Sh1.602 trillion.

CS Ukur Yatani has proposed to increase allocations to development to Sh675.2 billion from the originally approved Sh589.7 billion, meaning the government will have to borrow to bridge the deficit estimated at 8.9 per cent of GDP.

The National Treasury is expected to borrow about Sh1 trillion in the financial year ending June 2021, with the country’s debt estimated to hit the Sh9 trillion ceiling within the next two years.

IMF in May raised Kenya’s risk of debt distress to high from moderate due to the impact of the coronavirus crisis.

“The risk of debt distress has moved to high from moderate due to the impact of the global Covid-19 crisis which exacerbated existing vulnerabilities,” the fund said.