Kenya’s Crucial Crossroad for its Unbounding Debt Burden: An Interrogation of Kenya’s Concerning Debt Situation
When asked to estimate how much of Kenya’s debt can be attributed to corruption, Kenya’s former auditor general, Edward Ouko, said: ‘You are asking me a ballpark calculation? I think it is about 50%.’
Kenya’s debt situation has raised alarms about the sustainability of Kenya’s fiscal management, especially as external debt grows and the government faces challenges such as high inflation, corruption, and a less developed market. The analysis of Kenya’s debt situation reveals deeper governance and financial management issues - demanding urgent policy interventions. Despite Kenya’s high risk of debt distress, its public debt is considered sustainable according to the Debt Sustainability Analysis (DSA) report by International Monetary Fund (IMF) in June, 2023.
The Concern Around Kenya’s Debt Situation
A country’s debt-to-GDP ratio reflects its ability to repay debt, with a high ratio indicating greater difficulty in meeting debt obligations. The IMF recommends a maximum of 40-50% for developing countries. However, Kenya surpassed this benchmark in 2016 and is on track to nearly double it.
Figure 1: A graph portraying Kenya’s debt-to-GDP against the IMF recommended threshold from 2012 to 2024.
Kenya’s debt-per-capita offers more insight into the growing debt burden, reflecting what each citizen would owe if the national debt were evenly split across the population. Over time the country’s debt-per-capita has surged much faster than its GDP-per-capita, with the former standing at 202,169 Kshs by 2023 (approximately $1,600) versus a GDP-per-capita of 274,200 Kshs.
Figure 2: A graph comparing Kenya’s debt-per-capita and GDP-per-capita from 2013 to 2023.
When defending Kenya’s growing debt, many flock to compare Kenya’s debt to other countries that make its debt look modest on the global scale. Greece, a stark example of debt’s consequences, saw its debt-to-GDP ratio peak at about 180% in 2011-2012. Whereas Japan’s debt-to-GDP ratio was at 260% in 2022, one of the highest globally.
Though Greece’s situation was markedly worse than Kenya’s, leading to an economic recession it is still recovering from, Greece had the benefit of international support as a member of the Eurozone, allowing it to receive bailout packages from the European Union, IMF and European Central Bank (ECB). In contrast, Kenya may be developing a strained relationship with lenders due to concerns about fiscal discipline, debt distress and corruption. On a local and international scale, the Kenyan government has been facing accusations of irresponsible borrowing, particularly from China, inciting increasing fears of falling into a debt trap.
Additionally, the difference between Japan’s and Kenya’s debt lies in currency composition and fiscal approaches. Kenya’s debt is predominantly in foreign currencies, with 67.3% denominated in USD by December 2023. Making it vulnerable to defaulting, especially as the shilling depreciates. In contrast, Japan’s debt is largely domestic, and the country benefits from a more accommodative fiscal approach than Kenya, which also faces constraints and challenges like corruption and inefficiencies.
Figure 3: A graph highlighting Kenya’s external debt categorised in foreign currencies.
Bigger Issues of Corruption and Poor Governance
The Standard Gauge Railway (SGR) project and the Kimwarer and Arror dam projects have exemplified challenges of corruption and poor governance, highlighting concerns over fund mismanagement and their questionable use.
To generate revenue for debt repayment from the SGR construction, the Kenyan government mandated that most import cargo transported between Mombasa and Nairobi use the railway in 2018. Reportedly, no stakeholder consultation was undertaken to assess the potential impacts of this policy. Though it was eventually reversed, Mombasa’s economy suffered an immediate loss of 8.4% to its GDP by 2019 due to the SGR monopoly. On the other hand, the Kimwarer and Arror Dam projects were never constructed, despite being contracted in May 2017 and allegedly costing the Kenyan government 14.4 billion Kshs (approximately $101.6 million). Investigative journalists at Africa Uncensored found that the initial 2014 contract for the dams was a Public-Private Partnership (PPP), meaning that it did not require financial contributions from the Kenyan government, eliminating the need for loans. However, three years later without any documented explanation, the agreement shifted, leading to Kenya securing two hefty loans.
Ironically, debt garnered for the sake of infrastructure has resulted in less government expenditure on infrastructure. With development expenditure decreasing from 24% to 18% of government expenditure between 2019 –2022. Ultimately, this has hindered economic growth and further perpetuated the debt burden due to reduced revenue available for debt relief.
Fiscal Adjustments and Policy Action
The IMF states that ‘fiscal policy is not sustainable if it results in a continuous increase in the debt-to-GDP ratio and/or creates financing needs that cannot be adequately met by the supply of funds available to the public sector.’ Kenya fails to meet this criterion, emphasising the need for change.
Thus far the Kenyan government has had a more contractionary fiscal approach, with an attempt to reduce government spending and increase taxes. The latter was met with record civil unrest and widespread national protests as the new Kenyan administration introduced its second consecutive tax reform bill in a row. These punitive steps, alongside contempt brewed from the perceived opulence of government officials, resulted in the #EndFinanceBill2024 protests in June 2024. After protests sparked across the nation, with demonstrations occurring in 35 of Kenya’s 47 counties on June 25th, 2024, President William Ruto succumbed to the will of the people on the following day – withdrawing the Finance Bill 2024 on June 26th, 2024. This fiscal standstill seemingly leaves the President with his hands tied as Kenya’s debt burden mounts.
As alternative approaches are considered, a look is offered towards a more expansionary fiscal approach; an attempt to increase government spending and cut taxes to stimulate the economy. Japan, for example, boosted its economy through an aggressive expansionary fiscal approach, dubbed as Abenomics after the late Prime Minister, resulting in a consistent annual GDP growth rate of around 0.5%. However, consumer spending and wage growth dropped over time, highlighting some of the inefficiencies of this approach.
Nonetheless, a less constrained fiscal approach is unlikely to alleviate Kenya’s debt burden due to its high external debt, relatively high inflation rates, a significantly less developed market and rampant corruption.
Figure 4: A graph comparing the external and domestic composition of Kenya’s public data in relation to its percentage of GDP, from 2013 to 2022.
Focusing on implementing fiscal policies that enable debt restructuring via concessional borrowing, enhancing debt transparency and accountability, and promoting economic growth could be more effective solutions for sustainable debt management and long-term economic stability.
The first step towards uplifting Kenya’s debt burden could be to renegotiate its existing debt by securing loans that have lower interest rates and longer periods to pay back. This would free up money to invest back into the economy seeing as debt repayment made up 57% of government expenditure in 2023. Simultaneously, the exchange rate risk accumulated due to external borrowing would also be reduced.
Furthermore, implementing debt transparency and accountability in government practices would ideally reduce the chances of corruption and mismanagement, by making debt-related information publicly available and subject to scrutiny. This would also alleviate lender concern, promoting positive relationships as a result. Kenya’s Auditor General office was commissioned by the country’s 2010 Constitution, although in recent years, holders of this office have grown increasingly frustrated by lack of cooperation from the government. This state of affairs would need to be remedied in order to ensure all parties walk in step with each other as they work towards remedying Kenya’s fiscal mess.
Lastly, promoting economic growth is crucial in reducing the debt-to-GDP ratio but can only realistically be done if the existing debt and corruption issues are addressed. Policies that support small businesses, improve infrastructure and foster innovation can help grow the economy.
Kenya’s escalating debt underscores the urgent need for fiscal reforms. While contractionary fiscal policies have been met with public resistance and have proven inadequate in addressing the root causes of the debt burden, a shift towards more strategic management is crucial. Implementing policies focused on debt restructuring, enhancing transparency and accountability, and promoting economic growth, could offer more sustainable solutions. As East Africa’s most developed economy, Kenya still has hopes of alleviating its debt burden and steering towards a more stable and prosperous future for all its citizens.