World Bank tells Kenya to live within its means amid economic struggles

National Treasury Cabinet Secretary John Mbadi when he appeared before the Public Debt and Privatisation Committee at Continental House, Nairobi recently. [Elvis Ogina, Standard]

The World Bank has urged the Kenya Kwanza administration to rein in its public debt and adhere to fiscal discipline to mitigate vulnerabilities and ensure sustainable economic growth.  

In a new report published this week, the global lender emphasised the need for Kenya to reduce its debt burden to 55 per cent of GDP by 2029, a significant cut from current levels measured in present value terms. 

The report outlines a strategic framework for the government, calling for a multifaceted approach that includes increased domestic revenue mobilisation, expenditure rationalisation, and growth-enhancing measures. 

 

The Washington-based bank highlighted the necessity of refining systems related to cash management, public procurement, wage bills, and public investment management.  

“The Kenya government must reduce debt vulnerabilities and bring down the debt burden to 55 per cent of GDP by 2029 from the current level [measured in present value terms], consistent with Kenya’s debt anchor, through continued domestic revenue mobilisation, expenditure rationalisation, and growth-enhancing measures,” says the World Bank. 

“Improve efficiency, transparency, and accountability of public spending. Improve the cash, public procurement, wage bill, and public investment management systems to reduce inefficiencies and wastages at various levels of government.” 

The World Bank added: “Boost domestic revenues and improve the progressivity of tax policy, implement the Medium-Term Revenue Strategy (MTRS) to expand the revenue base, improve tax compliance, and reassess current tax instruments. This should be coupled with improvement in the progressivity and fairness of the tax policy.” 

These improvements are essential to reducing inefficiencies and wastages prevalent at various levels of government. 

The World Bank also stressed the importance of boosting domestic revenues through the implementation of the Medium-Term Revenue Strategy (MTRS). This strategy aims to broaden the revenue base, enhance tax compliance, and reassess existing tax instruments. Additionally, the bank advocates for a more progressive tax policy that promotes fairness and equity in the tax system. 

The urgency of these measures comes against a backdrop of rising public debt, which has become a pressing concern for Kenya’s economic outlook. Kenya’s public debt has surged alarmingly in recent years, with the Central Bank of Kenya (CBK) weekly bulletin showing it hit Sh10.79 trillion in September, raising sustainability concerns and prompting urgent calls for reforms, including potential tax increases and expenditure cuts.  

In addition, Kenya is pushing ahead with plans to secure a $1.5 billion (Sh193 billion) loan from the United Arab Emirates (UAE) despite warnings that this could exacerbate the country’s precarious debt situation.  

The International Monetary Fund (IMF), which is opposed to the loan has for instance urged caution regarding this loan, fearing it may further complicate Kenya’s fiscal landscape. 

The Kenyan government has previously acknowledged the importance of addressing its debt levels but has faced criticism for slow progress in implementing necessary reforms.  

Observers note that without decisive action, the country risks facing a more precarious economic situation, marked by reduced fiscal space and constrained public services. 

By focusing on domestic revenue generation and improving the efficiency of public expenditure, Kenya can lay the groundwork for sustainable economic growth and reduce its reliance on external borrowing. 

According to the latest economic update, the World Bank notes Kenya’s economic growth is projected to slow down in 2024. 

The country’s real GDP is now estimated to grow at 4.7 per cent a downward revision from the previous forecast. 

“Kenya’s real GDP is projected only to gradually pick up in the medium term; structural imbalances still hinder Kenya’s goal of sustained and inclusive growth that creates more and better jobs for its population,” says the report. 

“Growth in 2024 is estimated at 4.7 per cent, a downward revision from the June 2024 economic update following headwinds that have already impacted headline growth during the year.”  Several factors have contributed to this downward revision, including severe floods, subdued business sentiment following mid-year Gen Z-led anti-tax protests, tighter monetary policy, and ongoing fiscal consolidation.