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February 16, 2019

Kenya should monitor debt sustainability

Sustainability of public debt is a crucial policy problem for Kenya as a developing country. Every year, the government needs to finance its expenditure. It also expects to collect revenue from taxation. Whenever the spending is more than revenue, the government runs a deficit or a shortfall. If the revenue is above the spending, then there is a surplus. Ideally, both deficits and surplus ought to act as cushions whenever spending is temporarily high or low, or revenues are temporarily low or high. In practice, surpluses are rare while deficits are common.

The deficit is met from borrowing from either the local market or the international market, thus increasing the level of public debt. As the debt levels grow, the issue of whether the debt is too much or sustainable becomes a subject of debate. Whether the level of public debt is sustainable or not is rarely a precise issue.

Within levels, deficits and increasing public debt do not pose particular problems and may in fact be desirable. One of the issues is intergenerational fairness. Government spending today, for example, on infrastructure benefits future generations. Public debt is therefore aimed at spreading the costs between the present and future generations. Part of the costs is met by current taxes, and part by debt which may be repayable by future generations.

Regardless, there are indicators that debt levels could pose sustainability problems, calling for continuous monitoring. The present generation may underestimate the debt burden to the future generations. A large portion of the tax revenues may be directed to the repayment of the debt, at a cost to crucial services such as health and education or development.

According to the recent budget statement, the debt indicators point to a sustainable debt level. The level of the debt compared to the size of the economy at 48 per cent against a threshold of 78 per cent shows that the economy can support the debt levels. The debt level to revenue ratio shows that the country is spending about 30-35 per cent of the tax revenue on debt service, against a threshold of 30 per cent. This high debt service ratio is at the limit, which means there is need to increase revenue collection to accommodate further debt or control further growth. The external debt service to export ratio is also growing, increasing to 14.8 per cent in 2017 from 6.4 per cent in 2015. This means, while the country has grown the level of external debt, the exports which are the source of the foreign currency have not grown as much. The ratio is, however, within the threshold of 25 per cent. 


Kandie is a financial and risk consultant with First Trident

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