Kippra: Diversify external funding to tame Kenya's spiraling debt

Expanding the list of lenders and restructuring Kenya’s domestic debt policy are some of the recommendations fronted by a think tank to help the country regain its economic footing.

The Kenya Institute for Public Policy Research and Analysis (Kippra), a state-funded think tank under the National Treasury and Economic Planning, also wants an annual debt sustainability analysis.

The analysis, it says, would shed more light on where the country’s debt portfolio stands and possible plans for future borrowing. These recommendations are contained in Kippra’s report titled Public Debt: Management and Sustainability published on March 28, 2024.

The report analyses trends in borrowing, legal policy and institutional framework that guide these liabilities and public debt sustainability.

Kippra notes how Kenya’s appetite for debt grew from Sh1.6 billion at independence to Sh9.4 trillion in March 2023, with most of the borrowing happening after 2010 owing to the implementation of the devolved system of government and increased infrastructural development.

Between June 2010 and June 2022, the country’s debt accumulation was Sh7.5 trillion, more than seven-fold the amount accumulated between 1963 and 2009.

Kippra recommends Kenya reduce its reliance on a few bilateral lenders and commercial creditors by diversifying funding sources as one of the ways to manage debt.

“Explore opportunities to access financing from multilateral institutions, and development partners to reduce concentration risks and lower borrowing costs. It is also key to capitalise on public-private partnerships to tap private sector capital,” the report reads.

This diversification should also take currency risks into account, considering that most of the country’s debt is in US dollars.

By June 2022, the report says, the proportion of Kenya’s external debt held in US dollars stood at 69.0 per cent, a 31 per cent increase from June 2004.

“The proportion of external debt held in Euros declined from 35 per cent in June 2004 to 19.0 per cent in June 2022. Similarly, the shares of Japanese Yen and Sterling Pound decreased to 4.0 per cent and 2.0 per cent, respectively, in June 2022, compared to 27.0 per cent and 6.0 per cent in June 2004,” the report says.

This is as the share of Chinese Yuan-denominated loans increased from 3.6 per cent in June 2011 to 6.0 per cent in June 2022. Kippra says the dominance of the US dollar in Kenya’s external debt portfolio indicates an increasing burden of external debt and higher costs of debt servicing following the recent record depreciation of the shilling against the dollar. “For instance, in December 2020, the exchange rate was Sh110.6 against the USD, while in December 2022, it depreciated to Sh122.9 against the USD, representing a depreciation rate of 9.3 per cent,” says Kippra.

The think tank says it is important to ensure that public debt remains low and affordable. “In addition, there is a need to diversify fiscal funding sources and the mix of currencies to manage currency risks, while at the same time lengthening the maturity profile of public debt to reduce refinancing risks,” says Kippra.

In 2016, the National Treasury did front the idea of currency diversification in borrowing with a plan to access funding directly from China through the Yuan.

Kenya is currently considering floating Chinese and Japanese bonds to fill a funding gap in the upcoming budget.

Borrowing from the domestic market is also another way the Treasury is reducing the currency shocks that balloon debt obligations. The report notes Kenya’s domestic debt mix has shifted towards the long term, minimising refinancing risks associated with short-term instruments. Commercial banks own the majority of Kenya's domestic debt, which the research warns runs the risk of pushing out the private sector.

“Restructure domestic debt policies to mitigate the inherent risks associated with crowding-out of private sector credit,” the report says.

To ensure a closer look into the status of domestic debt, Kippra has called for a review of the Debt Sustainability Analysis Framework (DSF) for Kenya to include liabilities accessed from the local market.

“While the DSF is an important and comprehensive tool for analysing the debt sustainability for Kenya, it has a few challenges that can be considered to enhance the robustness of the framework,” says Kippra.