Kenya’s Debt Surpasses 65% of GDP, analysts expect long-term Economic Growth

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The International Monetary Fund in April approved a $2.34 billion three-year financing package to Kenya. The fund projects that Kenya will borrow upwards of $12.4 billion abroad by 2022. These funds will support Covid-19 prevention efforts and reduce the country’s debt vulnerability.

Financing Kenya’s Debt Burden

However, citizens are wary of the government’s borrowing spree amid grand corruption scandals hitting headlines. Even president Uhuru decries the fact that as much as $18.6 million is pilfered from public coffers daily. Moreover, Kenya’s public debt levels have hit Ksh.7.12 trillion. This accounts for 65% of Kenya’s Gross Domestic Product. According to a Parliamentary Budget Office (PBO) report, Kenya’s debt level will double by June 2030, accounting for over 100% of GDP.

The revenue authority has to raise revenue to service Kenya’s debt. In this regard, Kenya adopted significant tax measures in December 2020 to boost revenue collection. President Uhuru Kenyatta assented to the Tax Law Amendment Act of 2020. Income tax increased from 25% to 30%. On the other hand, VAT rates rose from 14% to 16%. “Close to 70% of government income comes from taxation,” says Renaldo D’Souza, at Sterling Capital. “So there needs to be a focus on ensuring tax compliance and collection, rather than increasing taxes from already strained households and businesses.” D’Souza says. According to Churchill Ogutu at Genghis Capital, Kenya will do whatever it takes to maintain market access. “The current Kenya’s debt pile arises due to revenue shortfalls and higher expenditure,” Ogutu says.

Kenya’s debt rating favorable-Fitch

Fitch Ratings on the other hand affirms Kenya’s debt Credit rating at a B+ with a negative outlook. Fitch says Kenya is in a favorable public debt position. Steady long-term economic growth will reinforce faster repayment of Kenya’s debt. Furthermore, lifting of lockdown restrictions has eased the chokehold on small-holder businesses. Domestic trade will spur macroeconomic stability in the coming few months.

In January 2021, Kenya secured a six-month suspension on $245 million of debt repayments to China. It also obtained six months of debt-service suspension from Paris Club creditors until the end of June. These interventions will ease pressure from settling the country’s debt burden. It will also help the taxman to mitigate revenue collection shortfalls experienced during the pandemic.

According to analysts at illuminate , longer-term capital inflows are expected into Africa. These will be influenced by sustainability-oriented strategies addressing risks such as climate change, electricity infrastructure, and transition from fossil fuel dependence. The impact of climate change on the region point to physical risks having a sizeable impact on economic growth. This makes the need for investment into adaptation strategies increasingly urgent.

According to a report by the IFSWF (International Forum of Sovereign Wealth Funds) and Franklin Templeton, most African countries have a sovereign wealth fund or are in the process of establishing one. However, much more must be done to address the perennial cancer of wrong risk estimation. This in the past led to the high premium placed on African bank risk.

From Beijing with Loans

It is undeniable that China is a global economic and industrial powerhouse. Beijing is the largest creditor to Africa. More than 20% of African debt is owed to China. From Kenya’s Standard Gauge Railway (SGR) to Ethiopia’s multibillion projects, China’s loans are the key ingredient to the continent’s recent infrastructure boom.  In addition, numerous African countries have sought loans from China to finance infrastructure projects.

The loans are tied to bilateral agreements on trade and Development financing. Angola leads the debt pack with a debt of $25 billion to China with Ethiopia and Kenya close behind with a debt of $13.5 billion and $7.9 billion respectively. Uganda’s public debt has also skyrocketed to $18 billion. However, Chinese lending is not an African bias. Japan ($1.3 trillion) owes most of the Chinese debt globally followed closely by Great Britain ($425 billion) and Ireland($331 billion).In addition, the Asian giant owns $1.1 trillion of the United State’s national debt. China’s debt alone has surged to 250% of its GDP raising concerns about its sustainability.

About Dickson Soire

Dickson Soire is a journalist from Kenya. He endeavors to use his skills in journalism, teaching and animation to educate, inspire and entertain young audiences. He aims to create relevant, timely and informative videos and articles that make technical information accessible to the public.