Public debt now at Sh10.6tr as State eyes to cut domestic borrowing

Controller of budget Margaret Nyakang'o speaking during the annual public debt management report 2023/2024. [File, Standard]

External debt payments almost doubled in the financial year ended June 2024 to hit Sh756 billion as the government intensifies efforts to cut its appetite for domestic credit that has squeezed out the private sector.

The increased payment is largely due to the maturity of the $2 billion (Sh260 billion at current exchange rate) Eurobond that put the country in a tight fiscal space in the first half of the 2023-24 financial year with possibility of default.

A new report by the National Treasury on public debt says external debt service payments rose from Sh402.4 billion to Sh756 billion, a growth of more than three times when compared to the expansion in the previous financial year. In the 2022-23 financial year, external debt service increased by Sh96 billion.

The report also shows the government paid Sh807 billion to service domestic debt with the total public debt stock now standing at Sh10.6 trillion.

While external debt service payments have increased by Sh354 billion compared to domestic debt that rose by Sh10 billion over the period, it is the steady growth of the latter that has become concerning to the government.

Public domestic debt as a percentage of total debt now stands at 51 per cent having increased from 47 per cent in 2022-23 financial year. This is while external debt dropped to 49 per cent in the period from 53 per cent in 2022-23.

Servicing of domestic interest, as a percentage of total interest paid on public debt, stands at 74 per cent in the latest Annual Public Debt Management Report.

While this is a slight drop from 77 per cent in the previous financial year, Treasury has listed strategies to tame this appetite as the report shows the government borrowed close to Sh580 billion from the local market in the year to June 2024

The report before the National Assembly says that as at the end of June 2024, the domestic debt stock was Sh5.4 trillion. This is an increase of Sh578 billion, which is 12 per cent more than the Sh4.8 trillion domestic debt stock as at the end of June 2023.

“The increase was attributed to the growth in the stock of Treasury bonds during the fiscal year to meet the government’s financing needs,” the report says.

“The stock of Treasury bonds was Sh4.6 trillion in June 2024 up from Sh4.0 trillion in June 2023, while Treasury bills stock was Sh615.9 billion in June 2024, up from Sh614.7 billion in June 2023.”

National Treasury Principal Secretary Chris Kiptoo said during the launch of the report yesterday that Sh1 trillion has been budgeted for public debt service in the current financial year. Of this amount, Sh750 billion will go towards domestic debt.

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He however exuded confidence that efforts by Central Bank of Kenya to reform the foreign exchange market and manage the interest rates in relation to the slowing inflation will play a key role in ensuring the government spends less on servicing public debt.

“For external debt payments, it means we will pay less shillings for the dollar and we hope the Sh260 billion we have budgeted to service external debt will be lower,” Kiptoo said.

He added that the exchequer is also likely to make savings when paying domestic debt through the expected lower interest rates.

“When we get revenues from Kenya Revenue Authority (KRA), we spend about almost Sh7 in every Sh10 to pay debt. That has been increasing.

"If we do not decelerate further accumulation of debt, it means we are going to be just collecting taxes to pay debt and especially interest.”

According to the report, Kenyans paid Sh1.6 trillion in 2023-24, up from Sh1.2 trillion, to service the public debt. Of this amount, Sh840 billion was interest with the rest going to repayment of the principal amount.

Interest on domestic debt was Sh622.5 billion while that on external debt was sh218.2 billion.

The report shows the total debt service as a percentage of ordinary revenue rose to 68.3 per cent in the period compared to 58.8 per cent in the 2022-23 financial year.

The report explains that this is a result of the repayment of the $2 billion Eurobond, high interest rates environment and depreciation of the shilling in the first half of the 2023/24 financial year.

The director general of Public Debt Management Office, Raphael Otieno, said the reason why domestic debt went up in the 2023-24 financial year had to do with unfavourable external market conditions for borrowing.

“During that period, access to the international market was limited for a very long part of the year and therefore part of the external borrowing that was planned could not be accessed,” he said.

Otieno said one way of ensuring the country’s debt levels are manageable is to retire some of the credit lines that are expensive in the public debt stock by accessing cheaper debt below market rates.

He also cited debt swap with the support of financial institutions such as the World Bank and Development Finance Corporation.

“In the domestic debt market, the immediate priority is to reduce the pressure on domestic borrowing. Paying interest rates of 17 or 18 per cent on bonds is unsustainable,” he said.

The DG noted that as the pressure on local borrowing reduces, this relief must be felt by businesses that need the funding.

“It is very sad to see that growth of credit to the private sector in the 12 months to September was only 0.4 per cent at a time when growth (of the economy) is at five per cent. That is not what we want to see going forward."