- Kenya’s stock of US-denominated debt has exposed currency vulnerability, steadily increasing debt repayment obligations.
- Total debt is above $69 billion, with external debt, primarily dollar-denominated, accounting for over $37.3 billion.
- Estimates show Kenya’s debt repayment bill increases by $271 million every time the shilling weakens by a dollar unit.
The Kenyan economy faces multiple near-term challenges—including limited fiscal and external buffers, elevated cost of living, exchange rate pressures, tight financial conditions—while global headwinds are weighing on activity. Consequently, the government has had no option but to squeeze taxpayers further to raise revenues to meet budgetary obligations as the depreciating shilling worsens Kenya’s debt and economic struggles.
This comes as the Kenyan shilling weakens against the US dollar and other major global currencies, pushing up the country’s spending on debt repayment. Kenya’s shilling has lost about 19 per cent of its value to the dollar year-to-date, exchanging at an average of KSh147.47 on Monday, 25 September 2023.
In the last eight months, the depreciating currency has pushed the country’s public debt repayment bill by at least $4.67 billion (Sh690 billion). The mounting external debt comes following the National Treasury heavy borrowing in recent years to bridge the budget deficit.
Kenya’s debt repayment obligations
According to Kenya’s Office of the Controller of Budget, the country’s stock of US-denominated debt has woefully exposed the weak currency, leading to a significant jump in the debt stock. Moreover, Kenya’s total debt repayment stock is above $69 billion, with external debt, primarily dollar-denominated, accounting for over $37.3 billion. The domestic debt stock is at about $32 billion.
Projections show that Kenya’s debt increases by about $271 million every time the shilling weakens by a unit of the dollar. According to Trading Economics global macro models and analysts ‘ expectations, Kenya’s debt-to-GDP ratio will hit 67 per cent by the end of 2023.
In the financial year ended June, external debt repayment (outflows) of principal debt amounted to $1.6 billion (Sh237.4 billion), according to the latest data by the National Treasury. This included principal repayments due to bilateral and multilateral organisations and commercial sources.
The debt service to exports ratio remains above the 15 per cent threshold due to subdued export growth leading to debt vulnerabilities, the international sovereign bond maturing in 2024, and the rollover of external commercial loans due in 2025.
The shilling’s depreciation against the US dollar affected Kenya’s repayment of the first $2 billion Eurobond in 2013, maturing in June 2024.
External debt pressures increased in 2022, as stringent US monetary tightening to tame inflation and the Russia-Ukraine war led to a spike in yields on Kenya’s active Eurobonds, worth $7.1 billion.
While Kenya enjoys strong support from the IMF and the World Bank, with ongoing reforms, it faces a potential debt crunch in June 2024, when the ten-year Eurobond will need repaying unless a yield retreat allows refinancing.
Concessional borrowing to finance capital investments
“To reduce debt vulnerabilities, the government has committed to a fiscal consolidation program and optimising the financing mix in favour of concessional borrowing to finance capital investments,” Treasury said in its Draft 2023 Budget Review and Outlook paper released last week.
Additionally, it said that a steady and robust inflow of remittances and a favorable outlook for exports would play a significant role in supporting external debt sustainability.
Overall, the present value of the debt-to-GDP ratio will remain above the 55 per cent threshold in the medium term but could decline gradually towards the threshold by 2027.
“The decline in debt levels is linked to the government’s commitment to pursue a fiscal consolidation path by broadening the tax revenue base and minimizing non-priority expenditures,” Treasury CS Njuguna Ndung’u said.
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Fiscal reforms to cut debt vulnerabilities
The present value of the debt-to-GDP indicator is projected to improve with the implementation of the fiscal reforms under the extended fund/extended credit facility program.
According to the Treasury, the government has incorporated a multi-year fiscal consolidation program into the projections. It is expected to lower the fiscal deficit and achieve a positive primary balance over the medium term.
This will reduce debt vulnerabilities, strengthen debt sustainability, and improve investors’ confidence, leading to robust private investment and economic growth over the medium term.
The lower domestic financing needs of the government, the Treasury said, will enable the expanded lending to the private sector by the banking sector.
Treasury plans to retain development spending in the budget at an average of 5.6 per cent of GDP not to impact growth momentum.
It expects this will enhance government investment in the nine priority value chains of leather, cotton, dairy, edible oils, tea, rice, blue economy, natural resources (including minerals and forestry), and building materials).
Additionally, it will support investments in crucial projects under President William Ruto’s Bottom-Up Economic Transformation Agenda (BETA), including the construction of dams, improvement of road networks and ports, and laying of additional national fiber optic networks.
Enhanced digitalization will be expected to improve efficiency and productivity in the economy. “In particular, investment in digital superhighway will result in enhanced connectivity and access to broadband services which will lower the cost of doing business, enhance efficiency and create employment opportunity,” Treasury said.
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Business condition post uptick
Last month, business conditions improved for the first time since January, according to the latest Purchasing Managers’ Index by Stanbic Bank Kenya.
Output and new orders returned to expansion territory amid more excellent political stability. At the same time, job creation accelerated, and purchasing activity picked up. Data shows firms grew more confident about their output prospects.
That said, the improvement in business conditions was only mild, with price pressures threatening to wipe out the gains. Indeed, input prices continued to rise at a historically strong pace, leading to the fastest increase in selling charges since June 2022.
Firms noted that improved food supply, increased marketing of products, and a calm political environment supported new order growth. Employment prospects remained promising as firms indicated hiring for a sixth successive month to complement existing teams and ramp up business activity.
Quantities purchased increased marginally, in line with output and new orders. Similarly, suppliers’ delivery times improved as vendors delivered items timeously to improve their cash positions.
“However, tough business conditions and inflation pressures remain a pressing concern for Kenyan businesses, as input prices and staffing costs were seen rising due to a weaker exchange rate as well as higher taxes related to the recently enacted tax measures in the Finance Act,” said Christopher Legilisho, Economist at Standard Bank.
The recent sharp increase in fuel prices will also push up inflation. This will pressure Kenyan households already struggling with high taxation and diminishing incomes.
Economic outlook
Over time, food security and climate change have led to severe crises – increased poverty and widening inequality across regions and households. Climate change-related woes are also leading causes of social conflicts due to competition for resources such as water.
According to Prof Njuguna Ndung’u, supply disruptions, inequality, poverty, and social conflicts are worsening the scenario for economies.
Estimates show Kenya’s economy will grow by 5.5 per cent in 2023 and above six per cent over the medium term. This growth will rise on the government’s Bottom-Up Economic Transformation Agenda that seeks economic turnaround and inclusive growth.
“Avenues of inclusive growth include creating jobs and agro-processing for export. This can only work if markets are properly governed,” Prof Ndung’u noted.
The Russia-Ukraine conflict, however, remains a concern as it is expected to continue impacting the global supply chains. This will cause supply disruptions, a surge in inflation, and a hit on incomes for regional exporters.
Most low-income countries need help with these factors, including surges in food and commodity prices. The devastating effects of climate change, debts, and limited access to foreign finance compound their woes.
These adverse economic effects have not left out both middle and high-income economies where a combination of factors are also hitting hard on the cost of living, Ndung’u noted.
According to the World Bank, the world’s poorest countries have spent most of their revenues on debt-service payments. Debt-related risks are increasing for low and middle-income economies, with Kenya exposed among those exposed.
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