Kenya: 5 things new government could do to reduce the country’s over-reliance on debt

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  • Kenya’s next government will be required to work on new strategies to reduce the country’s over-reliance on debt
  • The country’s debt stock stood at KSh 8.6 trillion as of May 2022, equivalent to 69.1 per cent of the GDP and 19.1 per cent points above the IMF recommended threshold of 50 per cent for developing nations
  • The incoming government could bridge the deficit gap by instituting austerity measures, reducing amounts extended to recurrent expenditure and focusing on developments 

Kenya’s next government will be required to work on new strategies to reduce the country’s over-reliance on debt.

According to analysts from Cytonn Investments, the country’s debt stock stood at KSh 8.6 trillion as of May 2022, equivalent to 69.1 per cent of the GDP and 19.1 per cent points above the IMF recommended threshold of 50 per cent for developing nations.

According to the analysts, Kenya’s new president will need to work on strategies to reduce the over-reliance on debt.

They will do this by implementing several measures, including enhancing fiscal consolidation efforts aimed at addressing the high fiscal deficit arising from the higher government expenditure as compared to the revenue collections, which has continued to be the key driver of the high borrowing levels.

The analysts said the incoming government could bridge the deficit gap by instituting austerity measures, reducing amounts extended to recurrent expenditure and focusing on developments that will give back to the economy.

It could reduce the country’s over-reliance on debt by diversifying funding of projects by removing bottlenecks to Private-Public Partnerships (PPPs) and joint ventures in order to attract more private sector involvement in funding development projects such as infrastructure instead of borrowing.

It could also reduce the country’s over-reliance on debt by continuing to implement tax measures aimed at expanding the tax base as well as compliance in order to increase revenue collection and reduce dependence on debt as the high level of debt reduces the prospects of economic growth since a large portion of revenues go to servicing the existing debts.

To minimize the country’s over-reliance on debt, Kenya’s new government will also need to strengthen the country’s Capital Markets in order to ease the pooling of funds by investors to undertake development projects, given that capital markets remain dormant as banks continue to dominate the market.

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Overall, the analysts noted that over the last ten years, Kenya’s public debt has grown at a CAGR of 18.2 per cent to KSh 8.6 trillion in May 2022, from KSh 1.7 trillion in May 2012 in comparison to the 4.4 per cent average GDP growth, an indication that the increase in debt is not translating into GDP growth.

The increase in debt stock has been partly driven by huge spending on large infrastructure projects and a widening fiscal deficit, which stood at 8.1 per cent of GDP in FY’2021/2022.

Nairobi City. Photo: Courtesy.

Over the 10-year period that Jubilee has been in government, Kenya’s debt to GDP ratio increased to 67.5 per cent in 2021, 26.3 per cent points higher than the 41.2 per cent ratio recorded in 2012 and 17.5 per cent points above the IMF’s recommended threshold of 50 per cent for developing countries.

According to the analysts, Kenya’s debt servicing costs have continued to increase over time, growing at a 10-year CAGR of 23 per cent to KSh 780.6 billion in the financial year 2020/2021, from KSh 98.6 billion in the financial year 2010/2011.

“The debt service to revenue ratio has also increased significantly in the ten years to 50 per cent, from 16.2 per cent in the financial year 2010/2011, posing a refinancing risk given the existing external shocks that further increase the servicing costs. This also indicates that a larger percentage of the revenues collected will be used to pay back debt instead of steering economic development.”

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Wanjiku Njuguna is a Kenyan-based business reporter with experience of more than eight years.

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