Kenya's Public Debt to hit KSh 7.8 Trillion in 2020/21, says PBO

Kenya’s Public Debt Stock is forecasted to reach KSh 7.8 trillion at the end of the 2020/21 fiscal year and will account for approximately 69% of Gross Domestic Product(GDP) and 87% of the KSh 9 trillion total debt ceiling.

According to a Parliamentary Budget Office(PBO) report, these public debt levels is projected to double by June 2030, accounting for over 100% of GDP.

Public Debt was KSh 7.12 trillion in September, 2020

Available figures indicate that Kenya’s Public Debt stock amounted to KSh 7.12 trillion as of the end of September 2020. This amount is equivalent to 65.6% of GDP or is 79% of the maximum public debt allowed under the PFM Act.

National Treasury mandarins have been faced with intense expenditure pressures, mostly related to substantial infrastructure projects under the Jubilee administration, such as the Standard Gauge Railway(SGR), as well as mounting external debt service obligations.

The PBO, whose primary function is to provide professional non-partisan advice regarding budget, finance and economic information to committees of Parliament, says this trend is projected to continue over the medium term.

The House Budget office points to the current expansionary economic blueprint being pursued by the Jubilee administration for the expenditure pressures, including the need for fiscal stimulus to support COVID-19 hit sectors. Rising debt servicing obligations also continues to drive expenditures.

This is even as revenue generation remains low and the economy to underperform.

In its report titled-EVADING RECESSIONARY PRESSURE UNDER A MOUNTING DEBT BURDEN, the PBO says that although Kenya’s overall stock of debt stock is seen as sustainable, other debt sustainability indicators paint a different picture.

At 63.4%, Kenya’s Present Value(PV) of debt to GDP ratio remains within the set limits, although solvency conditions are wearing thin.

However, other debt sustainability indicators have shot above their thresholds and appear to be deteriorating over the medium term.

These include the PV of public debt to revenue and grants ratio, debt service to revenue and grants ratio and PV of debt to exports ratio.

Effects of lockdowns in key markets in Europe has hit Kenya’s tea, coffee, flowers and tourism exports, hitting the country’s forex earnings.

Following the impact of the COVID-19, the PBO warns that the forecast will worsen, with all debt sustainability indicators breaching all limits in the medium-term period.

Options of lowering Kenya’s debt burden

The Parliamentary Budget Office has given options that policymakers and Treasury bureaucrats can use to reduce expenditure and cut Kenya’s bulging public debt.

These options, which can be implemented in the 2021/2022 budget and the Medium Term.

The PBO notes that the Kenyan economy is currently facing significant challenges with the COVID-19 pandemic worsening an already dire situation.

Due to pandemic related disruptions, many firms have shut down over the past months.
While revenue collection is subdued, PBO says fiscal indiscipline is rife with many public projects suffering from poor management and appraisal.

PBO report says Public investment appraisal and management are weak; hence, new projects are introduced at any budget stage.

The House Budget Office figures show that Kenya’s Foreign Direct Investment declined by more than 40 % in 2020.

It warns that debt accumulation concerns, particularly among investors, may also lead to loss of access to cheap external markets.

The PBO proposes some measures to reduce the expenditure pressures and accord Kenya some fiscal space.

These include enhancing investments, re-appraisal of all projects in the budget, setting up an empowered project management unit (PMU) at the National Treasury, and reducing the budget deficit to 3% of GDP in the 2020/21 financial year.

The long term goal is to balance the budget within the next three financial years.

This House think-tank also wants a freeze of expenditure growth for all spending categories, rationalization of State Corporations’ expenditure, and no new projects.

PBO recommends that Kenya reschedules its external debt to free more money to finance expenditure in the budget. It also wants Treasury to separating cash management and from macro-economic forecasting and budget preparation.

It also wants the Government to reduce its net domestic borrowing to zero, coupled with increased concessional financing.

PBO is also pushing for the revision of an arbitrarily set public debt ceiling.

Treasury CS Ukur Yattani is already seeking parliamentary approval to move the current KSh 9 trillion debt ceiling upwards.