Lawmakers in Kenya last week approved an increase in government borrowing ceiling to $85.7 billion or nine trillion shillings, based on a proposal from the National Treasury.
The new limit – about double the previous cap of 50 percent of Gross Domestic Product (GDP), with the debt at net present value – was presented in absolute figures and not as a percentage of GDP.
It allows the government, whose ability to service a mounting debt burden has been severally questioned, to raise borrowing up to an amount that almost matches the size of the entire economy.
The World Bank has since warned Kenya against piling up debt which the country may not be able to repay, adding that the government’s longing for expensive loans is pushing Nairobi towards debt distress.
Debt distress on the horizon
Borrowing has become one of the easiest ways for the Kenyan government to finance its swelling expenditure (mostly on infrastructure development) with a growing deficit in its budgets. As of June 2018, the country had about $3.8 billion of delayed projects due to a lack of funding.
In response, the government is cutting spending by officials from overseas travel to advertising by federal departments, Acting Finance Minister, Ukur Yatani said last month. The savings are to be deployed in completing abandoned projects before taking up new ones.
Some of its sources of debt funding include the United States (U.S.), Europe and international capital markets where it issues debt instruments. It also gets loans from China – currently its biggest lender – to fund projects.
Kenya’s chance of sliding into distress was raised to moderate by the International Monetary Fund (IMF) in October 2018, from low in recent years. This was due to increasing refinancing risks from the government’s borrowing spree which saw total public debt hit $54.3 billion (Ksh5.7 trillion) this June.
Presently at 62 percent of GDP, the public debt could reach 70 percent in the near future if the current rate of borrowing is sustained. At this point, Kenya would have crossed the threshold to debt distress.
“It is important that future debt management adopt measures to ensure debt is not accelerating,” Peter Chacha, a senior economist at the World Bank said at the launch of its Africa’s Pulse for the month, The East African reports.
One of the measures, Chacha continued, is to “ensure that in the planned fiscal consolidation the government must stick to a path that seeks to reduce debt from 62 percent of GDP towards 55 percent in the medium term.”
But there are even indications that the higher borrowing limit could thwart the planned fiscal consolidation because Kenya is likely to increase external borrowing as the government owes the domestic market too much.
Moreover, the economy is not generating enough revenues to cover the debt-servicing requirements and IMF this week reviewed Kenya’s economic-growth forecast downward from an initial 5.8 percent to 5.6 percent. This means it may be forced to borrow even more to repay existing debts.
To address this, Kenya must find ways to resuscitate the private sector to grow revenue collection instead of over-relying on the agricultural sector and public investments in infrastructure to drive economic growth, Chacha said.
Whether for development policy, loans for budgetary support or funding infrastructure, Kenya appears unable to wean itself from over-reliance on debt. And with the magnitude of the new borrowing cap, there is no end in sight for the worsening debt crisis just yet.