Kenya’s Debt Sustainability
By Godlivian Ojiambo, Portfolio Manager, Jubilee Asset Management Limited.
Kenya is in a new era that is full of uncertainties. The new regime is barely six months into power, but political activities have heightened. This is reminiscent of post-2017 elections, where the former President complained about his deputy’s early campaigns. While in 2017, the early campaigns might have been triggered by the famous ‘handshake’ (after a series of sustained ‘maandamanos’), this time round, no opposing political leader feels nostalgic for the past five years.
Amid all squabbles and rebuttals, Kenya and the whole world are generally undergoing a period of economic downturn. As we recovered from the effect caused by Covid and related variants, the Russia-Ukraine crisis and other geopolitical tensions added more salt to the wound. During the Covid-19 pandemic, Kenya sought a moratorium on its debt obligations, largely multilateral and bilateral, whose timelines have since ended and must be cleared.
Kenya’s Debt Sustainability.
All these factors beg the question of whether Kenya can clear its upcoming debt maturities in the worsening economic environment. Debt sustainability is the ability of a country to pay off its debt without needing to resort to measures that would negatively affect its economy. If a country is not at risk of default, it is deemed to be in a sustainable debt situation.
Kenya’s stock of public debt grew from KES 689 billion shillings to KES 8.56 trillion shillings from 2002 to 2022. The last decade has accounted for 85% of the borrowing of these amounts. Therefore, and without a doubt, the rising public debt and sustainability issues emanated from Uhuru’s ten years in office.
The Role of Fiscal Policy and Investment in Debt Sustainability.
According to Dalia Kahura, IMF’s deputy division chief in the IMF’s Strategy, Policy, and Review Department, debt that finances productive social and infrastructure spending can lead to higher income that may ultimately offset the cost of debt service and help balance the risks to debt sustainability.
In the case of Kenya, the bone of contention between the opposing political affiliations has been whether the accumulation of debt in the last ten years has been justified and whether there has been value for money. Our assessment is indifferent, not because we want to remain at the boundary of the political realm but based on several endogenous and exogenous factors.
Despite concerns about allocating development expenditure to non-priorities areas, the main issue is the mix between recurrent and development expenditure. A higher allocation to development expenditure would mean a more diversified approach focusing on short-term and long-term benefits.
The historical allocation of less than 25% to development expenditure has been a disincentive to GDP growth that would have supported higher revenue collections. We, however, do not see a significant improvement in the medium term given the rising interest service as a percentage of recurrent expenditure. Implementing austerity measures proposed by IMF and World Bank also has lagged, reflecting the recent supplementary budget estimates to parliament.
On a positive note, the current regime is bolder in raising more taxes. Judging from the tone of the President and the recent move to remove subsidies on fuel, the long cry of expanding the tax base is likely to be fruitful this time round. This will be buoyed by the new system at KRA aimed at improving the efficiency of vat collections.
Currency Depreciation and the Potential for Foreign Investment.
It is essential to highlight the impact of Kenyan currency depreciation against the dollar. As much as this has been the leading cause of ballooning external debt service in the last two years, it might work to attract more foreign reserves if foreign investors feel it is well-priced. There has been debate in the markets with assertions by bodies such as IMF that the Kenya shilling is overvalued. If the recent downfall in the Shilling will end this conversation, the government will comfortably raise foreign reserves to settle the upcoming 2.0 billion dollar 2024 Eurobond maturity.
Concisely, we rate Kenya as highly susceptible to debt default, especially 2024 foreign debt obligations. However, we see Kenya shilling depreciation as a short-term remedy in attracting reserves and keeping import cover above the minimum threshold. Fiscal consolidation efforts and budget allocation to productive sectors would only play a crucial role in the long term, given that we are just at the onset of a new regime. Uncertainties may persist with new fiscal policy unfolding, but less interventionist monetary policy would be essential in driving positive investor sentiments.