Alarm as Kenya's public debt servicing hits Sh1.7 trn

Public debt

The Parliamentary Budget Office  has raised alarm over the Sh1.17 trillion public debt servicing.

Photo credit: File

The Parliamentary Budget Office (PBO) has raised alarm over the Sh1.17 trillion public debt servicing this year, noting it will be a major constraint to the availability of resources to run government operations.

The amount is part of the Sh3.66 trillion budget for this financial year.

This means that the government will be required to borrow more to plug the deficit of Sh940 billion in the budget in the current financial year.

In its budget watch report for the 2021/22, PBO notes that as at June , Kenya’s public debt had already hit Sh7.7 trillion as the government plans to borrow more to finance its operations.

In 2018, the government raised its debt ceiling to Sh9 trillion.

The PBO document notes that public debt service contributes 88 per cent of the Consolidated Fund Services (CFS) expenditures.

It also accounts for over 66 per cent of ordinary revenues, rising from 44 per cent in the financial year 2019/20 and will make a substantial contribution to the fiscal deficit.

“Over the medium-term, expenditure on public debt repayment may crowd out development expenditure,” the PBO document says.

The National Treasury has committed to reducing the fiscal deficit as a share of the country’s GDP from 8.2 per cent to 7.7 per cent in 2021/22 to 4.5 per cent in 2023/24.

But PBO warns that without fiscal consolidation efforts, targeted expenditures aimed at spurring economic growth and improved efficiency in revenue collection, the fiscal deficit target may be unattainable.

The document further notes that the increase in debt servicing expenses has outpaced allocations for development for which debt is meant to finance by up to 189 per cent.

“This points to an over leveraged fiscal framework where borrowing is no longer productive. The reduction of debt servicing would yield higher benefits to the fiscal framework than reduction of any other expenditure item,” PBO says.

It adds that it will require serious considerations on debt reorganisation – a mix of debt suspension, conversion and forgiveness.

The PBO document points out that the underperformance of revenue has been one of the main drivers of the expanding fiscal deficit.

The growth in the fiscal deficit including grants from about 6 per cent in 2013/14 to close to 9 per cent in 2020/21.

This means that without specific interventions to enhance revenue collection, the fiscal deficit is expected to continue worsening.

The country is also not fairing well in terms of debt related risks.

The budget office notes that as of May 2020, Kenya was assessed as being at high risk of debt distress.

The impact of Covid-19 shock and related response measures on the fiscal framework, GDP growth rate and related uncertainty, exacerbated “this fiscal position by deteriorating debt sustainability indicators.”

This led to Kenya’s debt carrying capacity being revised from strong to medium.

The public debt benchmark of debt to GDP ratio was also reduced from 70 per cent to 55 per cent.

This is an indication that the public debt to GDP ratio of 62.4 per cent “is above indicative sustainability threshold and expected to remain so into the medium term.”

The document notes that while domestic debt risk remains elevated, increase in external debt risk will be of concern. As of December 2020, external debt maintained a low risk profile compared to internal debt stock.

But the refinancing risk is likely to increase over the medium-term owing to Eurobond debt servicing in 2024 and 2028 of Sh265.68 billion and the debt servicing suspension initiative whose aim is to reduce the debt servicing burden in the medium-term.

The budget office says that this might pile up debt servicing expenses in the long-term,  by between Sh25 billion and Sh35 billion annually.

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