Kenya’s stock of public debt as of May 2022 stood at Ksh 8,563.8 billion, up from Ksh 7,485.9 billion reported in May 2021. The ratio of domestic debt to external debt changed from 56:44 reported in May 2013 to 50:50 in May 2022. As a percentage of GDP, the debt stock increased from 64.5 per cent in December 2020 to 66.2 per cent in December 2021, partly due to increased investment in infrastructure pursued by the government to boost economic growth and development.
Figure 1: Kenya’s public debt stock (Ksh billion)
Exogenous shocks have seen spikes in the growth of public debt. For example, in 2020, Kenya recorded an annual growth in public debt of 20 per cent with increased borrowing to cater for the emergencies because of the COVID-19 pandemic. Prior to this, increased borrowing in 2009 when the country was implementing the Economic Stimulus Programme (ESP) following the post-election and global financial crises in 2008 saw the public debt grow by 21 per cent. Further, as the country witnessed a severe drought condition in 2011, again government borrowing increased the public debt by 21 per cent in 2012.
Government priorities have also led to spikes in growth of public debt. For example, public debt grew by 27 per cent in 2015 as the country issued its first Eurobond in response to growing fiscal pressures as the country transitioned to a devolved system of governance. Further, as the government enhanced infrastructure development, this saw the public debt growth rate average 20.4 per cent between 2013 and 2017 compared to 6.2 per cent in the period 2003-2007 and 16.4 per cent in 2008-2012. During these periods, government development spending as a percentage of GDP averaged 7.0 per cent in 2013-2017 compared to 4.2 per cent in 2003-2007 and 6.8 per cent in 2008-2012.
Policy Issues
As expected, public debt accumulation is responsive to the fiscal deficit (Figure 2). For example, fiscal deficit as a percentage of GDP increased from 0.05 per cent in 2003-2007 to 3.48 per cent in 2008-2012 and 6.56 per cent in 2013-2017. In 2009, when public debt grew by 21 per cent, fiscal deficit was at 3.12 per cent of GDP. Further, when debt grew by 20 per cent in 2020, fiscal deficit was 8.10 per cent.
Government expenditure has grown at a higher rate compared to total revenue over the years. For example, government expenditure grew by 13.84 per cent, 18.89 per cent, 15.20 per cent, and 9.28 per cent for the periods 2003-2007, 2008-2012, 2013-2017 and 2017-2021, respectively. Total revenue grew by 14.51 per cent, 13.68 per cent, 13.54 per cent, and 8.36 per cent over the same period, respectively. This has led to an increase in fiscal deficit and in turn public debt as the government borrowed to finance the deficit (Figure 2).
Figure 2: Public debt and fiscal deficit, per cent of GDP
While government borrowing helps to close financing gaps, public debt can be a burden if a significant proportion of revenue is used to service debt. Public debt service as a per cent of ordinary revenue has been on a rising trend, peaking at 57 per cent in 2019 before declining to 41 per cent in 2020 and rising to 50 per cent in 2021 (Figure 3). Over the same period, annual interest payments as a percentage of ordinary revenue have been on a rising trend to stand at 25 per cent in 2019, 28 per cent in 2020, and 32 per cent in 2021. Principal external debt payments as a percent of ordinary revenue over the same period was 8 per cent while interest payment was 7 per cent.
Figure 3: Annual debt service
During the COVID-19 pandemic, Kenya participated in the Debt Service Suspension Initiative (DSSI), joining other countries in January 2021. The purpose of DSSI was to relieve governments from the debt service burden as they responded to the COVID-19 pandemic. Kenya was expected to get external debt service relief of US$ 1,189.5 million. With the DDSI coming to an end in December 2021, monthly external debt service as a per cent of tax revenue saw a significant jump from 9.7 per cent in December 2021 to 34.7 per cent in January 2022. After that, cumulative external debt service as a per cent of total tax revenue averaged 16.6 per cent at the end of May 2022.
Figure 4: Monthly debt service, per cent of total tax revenue
A salient feature of Kenya’s external debt is that much of it is denominated in the US dollar. The US dollar-denominated external debt ranged between 68 per cent and 70 per cent of the total external debt from June 2019 to December 2019, just before the COVID-19 pandemic. It was over 64 per cent of the total external debt between January 2020 and December 2021 as shown in Figure 4, and constant at 67 per cent of the total external debt between July 2021 and December 2021 (National Treasury). There is, therefore, a risk of an increase in the value of the stock of external debt with the depreciation of the Kenya shilling against the US dollar. Notably, the Kenya shilling depreciated against the US dollar by Ksh 14.05 from Ksh 101.08 in January 2020 to Ksh 115.13 in June 2022. This implies that Kenya will pay more for maturing US dollar-denominated external debt. The National Treasury in the 2022 Medium Term Strategy recognizes the risk of exchange rate depreciation on external debt service.
Figure 5: Currency composition of external debt in Kenya
Conclusion and Way Forward
The government could ensure that borrowed funds are directed to more productive investments that stimulate growth of economic activity. This will see growth in GDP, revenue and exports that are key in computing the debt performance indicators. This can be achieved by strengthening the capacity of the Public Investment Management Unit of the National Treasury and implementing Ministries, Departments and Agencies (MDAs) in conducting pre-feasibility and feasibility studies for all development projects.
Further, the government could step-up its revenue-raising measures and rationalize public spending. This will entail exploring alternative revenue streams, for example by tapping into the digital economy and other emerging economies and promoting efficient use of the revenues.
Authors: Juvenalis Mutiso, Young Professional, Office of the Executive Director
Veronicah Ndegwa, Young Professional, Macroeconomic Department
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