What Kenya needs to do to get out of its growing debt crisis

Treasury CS John Mbadi. [Elvis Ogina, Standard]

Over the last two decades, Kenya’s public debt has undergone a significant transformation, evolving from manageable levels of public debt in the early 2000s to a source of national concern by 2024.

This journey, marked by ambitious infrastructure projects and external shocks, has left the country at a crossroads.

The newly appointed Cabinet Secretary for Treasury, John Mbadi, has a tough job of implementing the 2024/2025 budget amidst heavy debt burden, rising inflation and the public’s general opposition to tax increases. The choices Kenya makes going forward  will determine whether it can navigate its debt challenges and secure a stable economic future.

In 2002, Kenya’s public debt was a modest Sh 630 billion, equivalent to about 55 per cent of the country’s GDP. At that time, most of the debt was domestic, and the government’s borrowing was carefully controlled.

The election of President Mwai Kibaki in 2002 ushered in a period of economic reform, with a focus on infrastructure development as a catalyst for growth.

Under Kibaki’s leadership, Kenya embarked on key infrastructure projects, but borrowing was kept within sustainable limits. The country’s economy grew steadily, with GDP growth rates averaging 5 per cent per year. Improved tax collection and prudent fiscal policies helped keep the debt-to-GDP ratio stable, ensuring that Kenya’s growing ambitions did not result in an unsustainable debt burden.

The landscape of Kenya’s public debt changed dramatically with the election of President Uhuru Kenyatta in 2013. The Jubilee administration pursued an ambitious development agenda, launching mega-infrastructure projects such as the Standard Gauge Railway (SGR) and expanding the country’s road network and energy production.

However, these projects came at a significant cost. To finance them, Kenya turned increasingly to external borrowing, particularly from China and international financial markets. By 2020, the country’s public debt had soared to Sh 7 trillion, nearly 70 per cent of GDP. 

As debt levels rose, so did concerns about sustainability. A growing share of government revenue was being used to service debt, leaving less available for essential services like healthcare and education. The rapid accumulation of debt began to strain Kenya’s finances and raised questions about the long-term viability of this borrowing strategy.

By 2024, Kenya’s public debt had surpassed Sh 10 trillion, with the debt-to-GDP ratio climbing above 75 per cent. The country now faces a serious challenge: how to manage this growing debt burden without undermining its economic stability. 

On August 2, the global credit ratings agency, Fitch, downgraded Kenya's sovereign rating to "B-" from "B", citing heightened risks to Kenya’s public finances after the government backtracked on key revenue measures following the Gen-Z  protests. The downgrading of Kenya’s credit rating makes borrowing and, or debt restructuring more expensive, which adds pressure on the country’s finances.

The trend in Kenya’s public debt from 2002 to 2024 reveals a clear pattern: a steady increase in borrowing, particularly from external sources, to finance large-scale infrastructure projects. While these projects have contributed to economic growth, the rapid rise in debt has raised significant concerns about the country’s ability to sustain this level of borrowing.

To address the challenges posed by rising public debt, Kenya must adopt a series of prudent economic policies aimed at ensuring long-term sustainability. First, Kenya needs to improve its revenue collection mechanisms to reduce reliance on borrowing. Expanding the tax base, cracking down on tax evasion, and leveraging technology to enhance efficiency will be crucial. 

Secondly, the government must prioritise spending on projects with the highest economic returns. Implementing a zero-based budgeting approach, where every expense is justified annually, could help align government spending with national priorities.

Third, Kenya should explore options to restructure its existing debt to alleviate immediate financial pressures. This could involve negotiating with creditors to extend repayment periods, reduce interest rates, or consider debt-for-development swaps, where debt is forgiven in exchange for investments in critical sectors like education or healthcare.

Fourth, reducing reliance on public borrowing by encouraging greater private sector participation in infrastructure projects through public-private partnerships (PPPs) is essential. By sharing the financial burden with the private sector, the government can achieve its development goals without exacerbating its debt situation.

The fifth point is about diversification of Kenya’s economy, which remains heavily dependent on a few key sectors, making it vulnerable to external shocks. The government should invest in diversifying the economy by promoting industries focusing on manufacturing, technology, and value-added agriculture. A more diversified economy would generate additional revenue.

Lastly, strong institutions are crucial for effective debt management. Kenya should enhance the capacity of institutions responsible for managing public debt, such as the National Treasury and the Central Bank of Kenya. Transparent and accountable management of public debt will help build investor confidence and attract more favorable financing terms.

To ensure that Kenya can continue to grow without being overwhelmed by its debt, the government must adopt prudent economic policies focused on enhancing revenue collection, rationalizing expenditure, restructuring debt, promoting private sector involvement, diversifying the economy, and strengthening institutional frameworks. By taking these steps, Kenya can mitigate the risks associated with high public debt and secure a more sustainable economic future.