•IPF CEO James Muraguri, notes that the elevated risk of debt distress as highlighted by the IMF poses challenges in effectively managing external debt servicing.
•Findings the Institute of Public Finance show that the since 2014, persistent high fiscal deficits have resulted in a swift escalation of public debt.
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Kenya risks missing its economic growth targets in the medium term as the country grapples with high debt distress and a deteriorating macroeconomic operating environment, experts have warned.
The country finds itself in a tight spot following years of successive borrowing, coupled with the inability of the private sector to create sufficient jobs for millions of young people entering the job market annually.
Latest finding by an economic think tank, the Institute of Public Finance, shows that the since 2014, persistent high fiscal deficits have resulted in a swift escalation of public debt, now standing at 70 per cent of the GDP.
Last year Kenya was forced to part with half of its revenue collection to offset debt.
New disclosures by the National Treasury show that Kenya’s debt repayment reached Sh600.73 billion in the period to December 2023.
This meant that despite a rise in revenue collection, Kenyans had little to smile about as debt gobbled up 57 per cent of the Sh1.05 trillion tax revenues.
IPF in a new report titled Macro Fiscal Analytical Snapshot Report, says that the recent depreciation of the Kenyan shilling against the US dollar signifies a downgrade in the country's economic outlook.
IPF CEO James Muraguri, notes that the elevated risk of debt distress as highlighted by the IMF poses challenges in effectively managing external debt servicing.
Warning that for Kenya to maintain robust economic growth, it must put in place the necessary fiscal levers to promote faster private-sector-driven growth.
“Revenue optimism has been a persistent problem in Kenya for several years which in the past has tended to result in higher-than-planned fiscal deficits financed by additional borrowing," Muraguri said.
More recently, the rising global interest rates and a subsequent decline in inward foreign investments have caused the Kenyan shilling to depreciate steeply.
This has significantly increased the cost of external debt servicing and further putting pressure on Kenya’s foreign exchange reserves.
he adds that other impediments include Kenya’s vulnerability to climate shocks such as drought and floods which may derail growth over the long-term.
In the report IPF says the growth in Kenya has been led by non- tradeable services and exports have halved as a share of GDP, whereas external debts have increased.
Kenya’s external debt service as a proportion of exports is significantly above the level that the IMF considers sustainable for a country such as Kenya Even if the IMF reclassified Kenya as a country with “high” debt-carrying capacity, it would still be in breach of the upper limit until at least 2027.
While fiscal consolidation undertaken by the government over the past two years has relied on adjustments to expenditure, revenues are yet to fully recover to their pre- pandemic level.
Revenue mobilisation fell sharply in 2019-20 as a direct consequence of the measures implemented to reduce the tax burden on businesses during the pandemic.
Despite a variety of reform measures having been undertaken since then, revenues have been slow to return to pre-pandemic levels and have lagged previous projections and targets.
On the expenditure side, fiscal consolidation in the past two years has led to a decline in real per capita spending, impacting development and fiscal transfers to counties.
Counties heavily rely on national fiscal grants, constituting 91 percent of expenditures, with limited own-source revenue at 9percent.
“Until 2020/21, fiscal deficits were regularly higher than planned – the result of revenue optimism – and were financed by additional borrowing rather than corresponding cuts to expenditure," the report reads in part.
However, from 2021-22 onwards, this changed as Kenya’s debt dynamics started to bite as revenue shortfalls were matched by a comparable reduction in expenditure to ensure the deficit remained similar as planned.
Given the limited room for borrowing to address revenue shortfalls for the foreseeable future, it is likely that revenue and expenditure will be more closely linked over the intervening period,” Muraguri added.
While the government expects expenditure to rise, particularly in debt interest and development spending, this is contingent on revenue performance.
The evolving fiscal dynamics emphasise the delicate balance between managing debt vulnerabilities, revenue generation, and maintaining service delivery.
The fiscal landscape at both the national and county levels require a holistic approach to address revenue shortfalls, control expenditures, and foster economic resilience.
As Kenya navigates a complex economic landscape, sustaining robust growth and addressing fiscal challenges are imperative.
The government's dedication to fiscal consolidation and the mitigation of domestic and external risks will play a pivotal role in shaping Kenya's economic trajectory