The World Bank has warned Kenya against piling up more debt than the country can repay, even as Parliament this week approved to raise borrowing ceiling to Ksh9 trillion ($85.7 billion).
A World Bank report released on Wednesday warns that Kenya is drifting towards debt distress, owing to the government’s huge appetite for expensive loans.
The Kenyan Parliament, on the same day when the WB report was released, approved the National Treasury’s push to raise the borrowing cap from about 50 per cent of GDP to an absolute figure of Ksh9 trillion.
The possibility of Kenya sliding into distress is classified as ‘moderate’ having risen from ‘low’ in recent years, driven by the government’s rapid uptake of loans that saw the total public debt hit Ksh5.7 trillion ($54.3 billion) by June this year.
Public debt stands at 62 per cent of gross domestic product and could hit 70 per cent of GDP in the near future if the government continues to borrow at the current rate, ultimately meaning that Kenya would have crossed the threshold to debt distress.
“It is important that future debt management adopt measures to ensure debt is not accelerating. One of the measures is to ensure that in the planned fiscal consolidation the government must stick to a path that seeks to reduce debt from 62 per cent of GDP towards 55 per cent in the medium term,” said Peter Chacha, World Bank senior economist.
Mr Chacha was speaking in Nairobi after the World Bank released the Africa’s Pulse Biannual Report for October.
He added that Kenya must find ways to resuscitate the private sector to grow revenue collection instead of over-relying on the agricultural sector and public investments in infrastructure to drive economic growth.
The number of sub-Saharan Africa countries falling into debt distress or at high risk of external debt default has almost doubled in the past six years, driven by increased borrowing especially of non-concessional loans.
During the period, the share of foreign currency—denominated public debt increased by 12 percentage points from 2013, to 36 per cent of GDP in 2018, partly reflecting the surge in Eurobond issuance.
Kenya, Ghana and Benin have this year raised $2.1 billion, $3 billion and $549 million respectively in sovereign bonds.
Cape Verde, Mozambique and Sudan’s public debt has already surpassed 100 per cent of GDP.
Despite the growing threat of debt distress, Kenya and other East African countries are in the top percentile of growth performers in sub-Saharan Africa projected to attain a GDP growth averaging 4 per cent amid deceleration across the continent.
The report shows that Kenya, Rwanda, Tanzania and Uganda are among 10 countries whose growth will exceed 4 per cent in a year when overall growth in Sub-Saharan Africa is projected to rise to 2.6 per cent in 2019 from 2.5 per cent in 2018.
“Growth was solid and steady among countries in East Africa although (it) eased somewhat in Ethiopia and Kenya due in part to drought,” says the report.
Rwanda and Ethiopia are, notably, among the fastest-growing economies with GDP expansion exceeding 7 per cent.
Rwanda’s growth accelerated due to strong construction activities while the agricultural sector continued to expand.
In Uganda, the fiscal deficit is expected to widen owing to increased spending on infrastructure financing and lower revenue mobilisation while Tanzania has managed to maintain its fiscal and external accounts relatively under control.
The World Bank has downgraded the growth by 0.2 percentage points from its 2.8 per cent growth forecast in April, stating that apart from the debt quagmire, factors like rising trade tensions between the US and China and climate shocks would adversely affect growth in the continent.