There have been recent articles comparing Kenya's economy to that of Ghana which was placed in default in December 2022.
What is a default for a country? A sovereign default occurs when a country fails to pay back its loan. The International Monetary Fund (IMF) defines default as a breach of contract or broken promise. Sri Lanka is the latest addition to the list of defaulters.
When a country defaults on its sovereign debt, it usually approaches the IMF for assistance in the form of bailout packages. There is generally no consensus about the effectiveness of the IMF bailout packages.
The proponents of the IMF bailout argue that it has short and long-term positive impacts on the performance of the current account and the balance of payment and inflation while the opponents believe that the IMF bailout has a negative effect on the economic performance of the recipient countries. In fact, during a sovereign debt crisis, the effectiveness of a bailout depends on several other factors such as the country's macroeconomic fundamentals, political stability, and the gravity of external debt.
For instance, while the case of the Latin American economic crisis in the mid-1990s shows that conditionalities and austerity measures attached to the IMF bailout packages damaged economic development, the example of the Asian financial crisis reveals how the IMF helped the countries to return to the path of recovery and growth.
The 2021 IMF Article IV Consultation Report released in December 2021 notes that Kenya's public debt is sustainable but remains at a high risk of debt distress (DSA).
Under the baseline, public debt was expected to reach 71 per cent of GDP in the financial year (FY)21/22-FY22/23 (or 62 per cent of GDP in Present Value (PV) terms. The downgrade from the moderate risk classification in the May 2021 DSA reflects the economic slowdown following Covid-19 that exacerbated existing vulnerabilities.
Consequently, several debt indicators have worsened. While solvency indicators for the PV of external debt-to-GDP ratio and PV of total public debt-to-GDP ratios were below the thresholds under the baseline scenario, there were breaches of PV of external debt-to-exports ratio and one liquidity indicator - external debt service-to-exports ratios that were above the thresholds under the baseline scenario.
Kenya's ability to service debt is expected to improve as growth and exports recover. The key risk that Kenya will face is in 2024 when a Eurobond comes up for repayment.
-The writer is a financial and economics expert
