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World Bank Raises a Red Flag over Kenya’s Bulging Public Debt

Jackson OkothbyJackson Okoth
November 26, 2020
in Global News, Kenyan News
Reading Time: 4min read
World Bank Commits KSh8 Billion to Help Kenya Combat COVID 19

The World Bank has warned that Kenya’s rising public debt could reach distress levels, urging the Government to seek debt relief from external lending institutions and development partners.

The multilateral institution is recommending that Kenya makes use of available international debt service relief and other debt optimization strategies to release the needed fiscal space.

“Kenya’s debt position remains sustainable, but that the risk of debt distress has increased to high, due to the COVID-19 crisis weakening exports and real GDP growth and delaying fiscal consolidation,” says the World Bank in its 22nd Edition, dated November 2020, of Kenya Economic Update.

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The brief cites a pause in Kenya’s fiscal consolidation due to the COVID-19 pandemic, for the country’s rapidly rising public debt.

Figures from the National Treasury Quarterly Economic Budgetary Review shows that Kenya’s total public debt more than doubled to KSh 7.1 Trillion at the end of September this year compared to KSh 3.1 Trillion in September 2019.

During this period, the amount of external debt rose from KSh 3.1 Trillion to KSh 3.7 Trillion. Kenya’s domestic debt also rose from KSh 2.8 Trillion in September 2019 to KSh 3.5 Trillion as at September 2020.

External debt was 51.4 % of total public debt while 48.6% was domestic debt as at close of September 2020.

Available data from Kenya’s National Treasury shows that Kenya’s multilateral debt stood at US$ 12.4 Billion at the close of the 2019/20 financial year ended 30th June, 2020.

This debt level compares to US$ 8.1 Billion in June 2019 and US$ 8 Billion in 2018.

Kenya’s total external debt, made up of multilateral, bilateral loans, commercial loans and export credit was US$ 23.9 Billion in June 2018, rising to US$ 29.6 Billion in June 2019 and hitting US$ 33.1 Billion as at the end of June 2020.

This World Bank update says Kenya’s debt service obligations are large and growing, which constrains fiscal space for COVID-19 related spending and job-creating investments.

The rising expenditure on interest payments (currently at 4.3 per cent of GDP and accounting for over 25.2 per cent of total revenue) leaves little room for public spending on priority areas and emergency COVID-19 expenditures.

Furthermore, Kenya’s revenue and exports were on the decline relative to GDP even before the COVID-19 outbreak. Reversing this downward trend would boost Kenya’s ability to meet both domestic and external debt service obligations.

Furthermore, since most of Kenya’s external debt is denominated in US dollars (67.3 per cent), Kenya’s cost of external debt service obligations is vulnerable to US Dollar appreciation.

This World Bank’s Kenya Economic Update, which provides a detailed update of recent economic developments, also contains some grim prospects.

For instance, the update mentions that as Kenya continues to manage COVID-19 infections, the medium-term fiscal consolidation targets have been paused.

With lower domestic revenue mobilization and elevated budget expenditures before the unwinding of COVID-19 related fiscal stimulus measures, the budget deficit is expected to remain broad and add to Kenya stock of public debt.

The WB warns that public debt will rise by 2.8 percentage points to about 68.5 of GDP in the 2021/22 financial year.

The update adds that if Kenya’s fiscal imbalance is not reduced in the coming years, this will lead to further accumulation of domestic and external public debt, intensifying Kenya’s external debt vulnerabilities, crowding out private sector investment.

While Kenya is committed to medium-term fiscal consolidation, this may face challenges, including the 2022 general elections, warns the World Bank brief on Kenya.

The COVID-19 pandemic could also hit the balance sheet of major state enterprises, throwing Kenya’s fiscal consolidation plan off balance.

ALSO READ: World Bank Lends Kenya KSh107 Billion for Budgetary Support

Podcast; Key Takeaways from The World Bank Kenya Economic Update



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