Kenya's debt sustainable despite bordering distress, says Kippra

 

When President William Ruto met with IMF Managing Director Kristalina Georgieva on the sidelines of COP27 in Sharma El-Sheikh, Egypt. [PcS]

State-backed economic think-tank, Kenya Institute for Public Policy Research and Analysis (Kippra) says the country’s debt situation is sustainable even as it cautioned of possible distress if the economy does not grow.

Kippra’s fair bill of health on the country’s public debt is based on a projected drop of debt to gross domestic product (GDP) to 68.0 per cent in 2023/24 from 70.8 per cent in the 2022/23 financial year.

In the latest Kenya Economic Report, Kippra says public debt hit Sh10.3 trillion at the close of 2022/23. This figure however had surpassed Sh11 trillion by January this year.

Kippra executive director Dr Rose Ngugi said while Kenya is doing well in some parameters of debt management, it is deteriorating in others. “Are we sustainable in as much as the debt has gone up? Yes, from the indices, debt has gone up. Yes, we are at high risk of debt distress but it is still considered sustainable,” she said.

She said the country needs to watch out for the growth of GDP adding that some of the set parameters that guide public debt pegged on the economy are on the red.

These include the value of external debt to the export ratio, which has surpassed the 180 threshold and is projected to be 240.3 in 2024.

The debt service to export ratio has surpassed the threshold of 15 and is projected to be 36 this year. The value of debt to GDP ratio is also expected to remain above the 55 per cent threshold this year at 67.2 per cent.

While the debt service to revenue ratio was within the threshold of below 18 per cent in 2023, it is projected to be 28.5 per cent this year but later on ease. “One can attribute it to the exchange rate situation but also we can attribute this to the tightening financial conditions at the international level which we have no control as a country,” Dr Ngugi explained.

This is confirmed by the report which details an increase in public debt attributed to the depreciating exchange rate that put pressure on external debt. The report states that public debt service cost in 2022/23 was 58.8 per cent of the revenue, up from 47.9 per cent in 2021/22.

“The increase in the share of debt service to revenue was characterised by increased external debt repayment that resulted from the depreciation of the shilling against the dominant foreign currencies within the external debt portfolio, and high-interest payments on domestic debt due to the high domestic interest rate environment,” reads the report.

The report adds that the increasing debt-to-revenue ratio indicates that generated revenues are increasingly being used to repay public debt at the expense of productive expenditure needs.

It notes that domestic debt accounts for the largest share of total debt service at about 66.7 per cent. Dr Ngugi said Kenya has a significant proportion of debt composition from multilateral sources.

This, she noted, is a good sign as it means there is a growing size of concessional funding that usually comes with favourable interest rates. “We are at about 50 or 49 per cent of the external debt is made up of concessional funding,” she said.

She said while there has been an increase as far as external debt is concerned, it is now almost a 50-50 contribution with domestic. According to the report, domestic debt as a share of GDP stands at 33.3 per cent as of 2022/23 while external debt is represented by 38.2 per cent.

The report says the public debt strategy of increased share of concessional loans has yielded positive results. However, debt vulnerabilities remain high. “Nonetheless, public debt sustainability remains exposed to exchange rate and interest rate shocks, volatilities in global financial markets, and rollover risks,” the report says.