• Kenya is currently under risk of high debt distress with the country’s debt to GDP ratio currently at 62.3 and 12.3 percent above the recommended IMF threshold.
•Additionally, Kenya’s debt stood at Sh8.7 trillion as of October 2022 which is Sh1.3 trillion less the Sh10.0 trillion debt ceiling.
Image: /TREASURY KE
Kenyans are starring difficult economic times ahead as government moves to ramp up revenue collection to pay off part of Eurobonds and SGR debt that are due in March.
The government is facing foreign debt repayment estimated at Sh63 billion ($506.7 million) in the next month.
In the event of a failure in the payment terms, Kenya risks a further escalation in debt that may occur due to a breach of the agreement.
However, despite the Kenya Kwanza government walking a tightrope in its efforts to offset the maturing debt, experts reckon that this may just be the beginning.
Already the country is struggling with reducing foreign-exchange reserves which dropped to 3.92 months of import cover against the statutory requirement of 4 months.
Kenya’s reserves have been dwindling in recent months partly because of repayments to bilateral and commercial lenders.
These are the reserves used by countries to meet their international financial obligations such as paying foreign debts, influencing monetary policy and supporting imports.
“We expect the government to borrow aggressively from both the domestic and foreign markets as it aims to plug in the fiscal deficit, which is projected to come in at Sh689.2 billion in the 2023-2024 fiscal year,” a 2023 outlook report by investment firm Cytonn revealed.
Debt Distress
According to International Monetary Fund and the World Bank, Kenya is currently at risk of high debt distress with the country’s debt-to-GDP ratio currently at 62.3 and 12.3 per cent above the recommended IMF threshold of 50.0 per cent for developing countries.
Last year, rating firm, Fitch said the country is facing elevated external debt service obligations in 2023-2024, including the maturity of a $2 billion Eurobond in June 2024 and high current account deficits, which will lead to sustained pressure on international reserves.
“We forecast external debt service to rise to 24.8 per cent of current external receipts in 2024, up from 16.6 per cent in 2023, owing to the June 2024 $2 billion Eurobond payment,” said the report.
Fitch downgraded Kenya’s credit rating from "B+" to "B", attributing the action to the country’s persistent twin fiscal and external deficits.
Additionally, Kenya’s debt stood at Sh8.7 trillion as of October 2022 which is Sh1.3 trillion less the Sh10 trillion debt ceiling.
From this, the total debt is nearly breaching the debt ceiling and with the projected Sh695.2 billion for 2023-2024 fiscal year borrowing.
According to the report, the government would need to consider a new debt ceiling as the current one is likely to surpass the Sh10.0 trillion mark in the near term.
Consequently, the government will face significant pressure to service the existing debt with the debt service to revenue ratio standing at 51.0 percent as of December 2022.
A high level of debt reduces the prospects of economic growth as a large portion of revenues is used to service the existing debt as opposed to development expenditure,
Revenue
“On revenue collection, we expect continued improvement in 2023 due to the raft of measures proposed by the Kenya Revenue Authority and the proposals in Budget Policy Statement 2023,'' the report reads in part.
Some of those proposals include:- reducing Value Added Tax (VAT) gap to 19.8 per cent from 38.9 per cent, minimizing the Corporate Income Tax gap to 30 per cent from the current 32.2 percent and integrating KRA Tax Systems with Telecommunication companies.
However, the report cautions that an upward revision of taxes comes at a time when the business environment remains subdued which will weigh down on the projected revenue performance;