Kenya risks missing its economic growth targets over the next 5 years as it grapples with high debt distress and a deteriorating macroeconomic operating environment.
According to the Institute of Public Finance (IPF) in its latest Macro Fiscal Analytical Snapshot Report, 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.
- •The report notes that since 2014, persistent high fiscal deficits have resulted in a swift escalation of public debt, now standing at 70% of the GDP.
- •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 experts have divided opinions on whether Kenya’s debt levels are sustainable, the continued depreciation of the local unit against the US dollar signifies a downgrade in the country’s economic outlook. The elevated risk of debt distress as highlighted by the International Monetary Fund(IMF) poses challenges in effectively managing external debt servicing.
Speaking during the official launch of the report, the Institute of Public Finance (IPF) CEO James Muraguri noted that for the country to maintain robust economic growth, it must put in place the necessary fiscal levers to promote faster private-sector-driven growth.
Other impediments include Kenya’s vulnerability to climate shocks such as drought and floods which may derail growth over the long-term.
“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. More recently, rising global interest rates and a subsequent decline in inward foreign investments have caused the Kenyan shilling to depreciate steeply, significantly increasing the cost of external debt servicing and further putting pressure on Kenya’s foreign exchange reserves,” he said.
- •Like many African countries, growth in Kenya has been led by nontradeable services and exports have halved as a share of GDP, whereas external debts have increased.
- •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.
- •Despite a variety of ongoing reform measures, 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.
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