Kenya’s Public Debt Serving Cost is growing fast with experts raising fears that if the Kenya Shilling exchange rate against the US dollar continues on its current slide, by a further 5%, this will translate to an additional repayment burden of KSh 2.6 billion per month.
According to a report by Faida Investment Bank, Kenya’s public debt has risen rapidly over the past decade from KSh 1.9 trillion in June 2013 to KSh 9.7 trillion by June 2023. The sustained depreciation of the shilling continues to put pressure on the government’s ability to finance external debt.
By the end of April 2023, the stock of external debt stood at KSh 4.9 trillion (US$ 34.5 billion). Holding all factors constant, if the Shilling is to depreciate by a further 5.0%, it would pile an additional KSh 242.6 billion in the current stock of external debt.
In addition, the external debt servicing costs stood at KSh 378.3bn (KSh 137.2billion in interest and KSh 241.1billion in principle) at the end of the 2022/23 financial year. This is expected to shoot up by 64.2% to KSh 621.3 billion (KSh145.7 billion in interest and KSh 475.6 billion in principle).
Shilling Depreciation putting pressure on external debt
The Kenya Shilling has generally been depreciating against the US dollar since 2005. During the 2005-2012 period, it depreciated by 10.5% from 76.2 to 84.2 against the US$. It maintained the same trend during the 2012-2022 period, weakening further by a significant 37.0% from KSh 86.0 to KSh 117.8 against the greenback. As of August 17th, the Kenya Shilling had depreciated by 16.87% against the US$ to144.2
Kenya’s debt-to-GDP ratio rose from 49.5% in June 2012 to 69.1% by the end of the second quarter of the 2022/23 financial year,19.1% more than the IMF’s recommended threshold of 50%.
Kenya’s public debt mix in the last decade has seen a rise in external loans while domestic borrowing has been dropping from 55.5% (2013) to 49.9% (June 2022). External borrowing has risen from 44.5% to 50.1% over the same period.
The composition of domestic debt dropped further from 49.0% (January 2023) to 47.1% (April 2023). However, given the current external debt market conditions, experts forecast heightened uptake of domestic debt, albeit at increasing interest rates.
Given the government’s current debt levels and obligations, the fiscal structure, and the macroeconomic environment, observers maintain that Nairobi has very little wiggle room to negotiate for better terms. In line with this, Kenya has been forced to go back to relying on institutions such as the IMF and the World Bank, a dependency that also comes with stringent conditions.
For instance, Kenya has been told by the IMF to lose its loss-making state-owned enterprises.
By the end of June 2022, the amount of publicly guaranteed loans stood at KSh 145.4 billion. In addition, out of the 260 state corporations, 19 had non-guaranteed public debt amounting to KSh 99.3 billion (0.8% of GDP, an increase from 0.1% in 2021) out of which 15.2% is held in domestic currency obtained from local banks.
Unless privatized or restructured, this trend of State Owned Enterprises accumulating debt is expected to continue, given the financial difficulties many of them face.
According to the Auditor General’s report for 2019/20, many SOEs have negative working capital and are unable to meet their financial obligations, which puts them at risk of defaulting on their loans.
ALSO READ: Kenya’s Public Debt Crosses the KES 9 Trillion Mark
