Kenya’s Debt: A Crisis?

Kenyans online have continued with protests against the International Monetary Fund (IMF) loans days after the institution approved a KES 276.7 billion loan request.

Many Kenyans took to IMF’s social media pages lamenting and questioning why the international lender had approved the loan which is worsening Kenya’s current debt crisis. For some, what is even more frustrating is that, before approving the loan request, the lender failed to conduct a satisfactory audit of monies issued to the country in the past in processes marred by allegations of mismanagement and corruption.

Following the uproar, Sera Afrika sought to investigate the situation and explore ideal responses based on relevant data available on the issue.

What is the problem, and why is it of concern?

For many Kenyans, the concerns are simple: the rising level of external debt; and why more loans are being granted to the country.

This, in addition to ubiquitous cases of corruption and mismanagement rendering the debt taken up in non-productive uses, has left Kenyans feeling disenfranchised by a borrowing scheme of inadequate benefit to the country.

The fact that the funds are being used to finance excessive recurrent expenditures, which do consume a significant portion of government spending by the same individuals that are being accused of ongoing mismanagement, is intolerable.

It’s plain to see why there’s such a fuss.

Understanding the debt situation in Kenya

Despite rising external debt levels, Kenya actually has a favourable debt structure with foreign currency debt compromising half of government debt versus the current median of 63%. The median represents the average ratio of foreign currency debt to total government debt in countries with a similar ‘B’ rating according to long-term foreign currency issuer default ratings.

High external debt reflects a recent history of large current account deficits (CAD) and a lack of nondebt-creating investment flows. Lower capital imports and an increase in remittances have helped narrow the CAD to an estimated 4.8% of GDP in 2020 after averaging 7.3% between 2010 and 2019. Despite this, Kenya’s debt is forecasted to reach 68.8% of GDP in FY2021 and thereafter rise to stabilise at 71%. With Kenya’s debt being 382% of the government’s revenue-generating capacity, the country is some ways behind the 218% median debt/revenue median of its B-rated peers.

Why is there so much debt in the first place, and is there a need for more? It is simple, we cannot afford to not borrow.

52% of our national budget goes to the repayment of debts and interest, and with an ever-increasing wage bill, a high percentage (around 47) goes to to the payment of public sector workers. This means that Kenya is not able to afford legitimate expenditure ends of making capital investments, repaying existing national debt, and paying public sector wages on its own. This points to a structural problem. There are calls for a balance of obligations pointing to an issue with the national budget and public sector finance management in the first place.

Although Kenya’s economy is larger than its debt, national revenue collection (projected revenue for 2020/21 is KES 1.89 trillion, which is 18.6% of GDP) is much lower than the budget (KES 2.79 trillion, which is 24.7% of GDP), meaning the government needs to borrow to make up for the difference. Reading the conditions of the recent loan by the IMF, the intention is to aid the government to get its finances in order over a short-to-medium term period of 3 years. Kenya’s B+ long-term foreign currency issuer default rating, and the willingness of the IMF to advance further loans, is actually a testament to the growth potential foreseen in the country.

The loan is an economic restructuring alternative, sought as a result of the limited options available to the government. The austerity measures needed to scale back spending and pay off loans completely would cripple the economy, and defaulting on existing loans would result in repossession of the country’s assets. Both are situations Kenya is desperate to avoid.

The Solution?

#ResponsibleInvestmentPolicies

Debt is not bad if it is invested in programmes that boost productivity. The solution lies in policy.

Kenya’s debt governance structures do not seem to bridge the gap between public finance management and economic growth. They leave a lot to be desired and indicate the need for strong policies to ensure borrowed funds serve the country more than just covering extant obligations.

Strictly speaking, the impending IMF loans are good for Kenya in its current debt situation. Public confidence, however, should not be contingent on ‘strictly speaking’. It is based on a situation where debt is not a shackle to past mismanagement but a tool that visibly pays towards a stable, prosperous future. In light of the discussions above, the protests by Kenyans on social media represent an outcry for structure. Structure that finds its roots in informed, responsible debt investment policies. Effective policies would come in to strengthen public finance management specifically on how the government raises money through tax revenues and manages its public debt. This would inform priority expenditure decisions, provide for eventual audit procedures to ensure reduction of current account deficits, and provide assessment and accountability approaches to decisions instead of outcry-generating but necessary debt management in the future.