Kenya has breached the East Africa Community ceiling on debt accumulation, as the national Treasury borrows heavily to finance government operations amid falling revenue collection and poor economic performance.
A unanimous vote by the country’s lawmakers, about two weeks ago, to increase the debt ceiling to Ksh9 trillion ($90 billion) in the current 2019/2020 fiscal year has compromised the government’s bid to comply with the region’s debt target that is equivalent to 50 per cent of the GDP and weakened the country’s debt sustainability indicators.
The Parliamentary Budget Office (PBO) said Kenya’s growing debt-to-GDP ratio, which currently stands at 61.8 per cent, has put the country in a difficult position to comply with the regional agreement on the attainment of a single currency regime.
“The country will no longer comply with the EAC convergence criteria, which it is a signatory to,” the PBO said in its submissions to the Parliamentary Committee on Delegated Legislation in Nairobi.
According to the PBO, the raised ceiling will also increase debt repayment and undermine the credibility of the national budget that had proposed to reduce the debt-to-GDP ratio to 50.6 per cent in the 2019/2020 fiscal year.
Kenya’s higher level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly 20 per cent of collected revenues.
“Currently, the country has surpassed some of the debt sustainability thresholds. Particularly more distressing is the debt service-to-revenue ratio. This implies that the economy is not generating enough revenue to cover the debt servicing requirements,” said PBO.
“The risk is that the country will continue to borrow to repay the existing debts and not for development expenditure as contemplated in law.”
Debt service-to-revenue ratio
According to Treasury, Kenya’s public debt service-to-revenue ratio increased from 16.5 per cent in 2012, to 35.8 per cent in 2017, 30.5 per cent in 2018 and is expected to increase to 33.4 per cent in 2019. The IMF threshold is 30 per cent.
“Already our public debt is approaching three times our national budget and we are spending more of our tax collections on servicing the debts than delivering services to the citizens. The increasing debt is straining the fundamentals of the economy,” said Scholastica Odhiambo, a senior lecturer at the School of Business at Maseno University.
According to analysts at investment firm Amana Capital, Kenya’s debt has changed from being productive to unproductive thereby creating a net burden on the country in increased taxation.
Kenya’s total debt as at June 2019 was Ksh5.81 trillion ($58 billion and 61.8 per cent of GDP) and the parliament voted to increase the borrowing ceiling to Ksh9 trillion ($90 billion) giving Treasury more room for additional borrowing.
According to Kenya’s Institute of Economic Affairs, the government’s expenditure has persistently been on an upward trend over the past decade, from 22.3 per cent of GDP in 2008/2009 fiscal year to 27 per cent of GDP in 2017/ 2018, with a high rate of accumulation of new debt.
Kenya had projected that the total public debt as a share of GDP would be 44 per cent (Ksh7.21 trillion, $72.1 billion) by the 2022/2023 fiscal year, much less than the 61.8 per cent as of June 2019.
“Additional room for borrowing will increase the chances of additional loans from external sources since domestic borrowing is not a viable option at the moment,” said the PBO.
“The current situation in the domestic market is that the government has crowded out private sector borrowers since lending to government is deemed to be risk-free with guaranteed returns. This reduces credit to the private sector, which in turn adversely affects growth in investment, growth of SMEs and creation of job opportunities.”
According to the PBO, increasing the debt ceiling is likely to increase external borrowing and mainly from commercial sources that are more expensive.
“The evolution of commercial debt since the 2012/2013 fiscal year indicates that it has increasingly been a source of financing the budget deficit because it is easy to acquire with less demanding conditions when compared with concessional funding from multilateral and bilateral agencies,” said the PBO.
“However it is a high risk option and also more expensive given that the interest rates are higher with a shorter payback period. If the country is not able to generate the targeted revenue in the short term before the return on investment is realised, then it faces a refinancing risk and this forces the country to get into a debt rollover.”
It is argued that if the debt ceiling is increased then there should be a limit on external borrowing at commercial rates to contain external vulnerabilities.