Growing appetite for borrowing pushes Treasury into debt maze

Kenya’s debt situation has worsened this year, with a borrowing of more than Sh530 billion between January and July, even as things are projected to worsen in the coming years.

The latest information on the growing borrowing appetite shows the government contracted 10 loans of Sh293.5 billion between April and July, pushing up public debt to Sh7.81 trillion.

This translates into 69.1 per cent debt on the country’s gross domestic product (GDP), and an average monthly borrowing of Sh75 billion, in the seven months to July.

The debt levels by July are a sharp rise from December 2020 at Sh7.28 trillion (65.6 per cent of the GDP), and indicates worsening status of public debt, even as oversight bodies pile pressure on the government to cut on borrowing and implement fiscal consolidation measures in public service.

“The debt stock is established to have increased by 15 per cent from financial year 2019/20; and is forecasted to reach Sh8.8 trillion and Sh9.8 trillion in June 2022 and June 2023, respectively.

This leaves only four per cent or Sh1.29 trillion to finance the fiscal deficit for financial year 2020/21 (Sh929.7 billion) and financial year 2022/23 (estimated to range between Sh775.8 billion and Sh940 billion),” the Parliamentary Budget Office (PBO) noted in its latest report on public debt management.

The office added that debt service, a mandatory expense, is estimated to account for over 60 per cent of ordinary revenue and 10 per cent of the GDP by 2024, reducing resources available for other critical expenditures.

“Total debt service is projected to reach Sh1.36 trillion by the end of financial year 2022/23. At this level, it will have outpaced the development expenditure share of the GDP (five per cent) and will be rising faster than recurrent expenditure share of the GDP,” the PBO warned, noting that the current Sh9 trillion debt ceiling cannot hold.

Among the 10 loans acquired between April and July was an international sovereign bond of Sh110 billion from Citi Group Global Markets Europe AG on June 14, which will cost Kenya about Sh90 billion in interest, by the time it is fully repaid—January 2034.

The loan is an example of how Kenya has been accumulating debt, with service costs continuing to create fiscal pressures at the Treasury, and squeezing expenditures for other obligations, including development.

The government’s unstoppable borrowing habit continues despite risks on debt sustainability, as debt service charges take a heavy toll on the budget, and as allowable borrowing limits thin.

By the end of July, the last time the Treasury updated figures on the total nominal public and publicly guaranteed debt stock, Kenya had a Sh7.81 trillion debt—Sh3.79 trillion domestic and Sh4.02 trillion external.

“The actual cumulative external debt service as at the end of July 2021 was Sh29.50 billion. External debt service during the month of July 2021 was Sh29.50 billion, comprising principal and interest payments of Sh17.72 billion and Sh11.78 billion respectively. Cumulatively, debt service to bilateral creditors accounted for 82.5 per cent of the total debt service, while commercial and multilateral creditors accounted for 9.7 per cent and 7.8 per cent respectively,” the Treasury said.

The controller of budget reported this year that the government spent Sh765.9 billion paying loans in 2020/21, which the PBO projects will increase by about 78 per cent to Sh1.36 trillion by 2023.

The Treasury’s 2020/21 report projected public debt to rise from Sh7.7 trillion by June 2021, Sh8.6 trillion in June 2022, Sh9.4 trillion in June 2023, Sh10 trillion in June 2024, and Sh10.6 trillion in June 2025.

This means between June 2021 and 2025, Kenya will borrow amounts equivalent to 37.7 per cent of what it has borrowed since the nation was born, or 79.7 per cent of the Sh5.9 trillion the Jubilee administration borrowed between 2013 and June 2021.

Over the same period, the Treasury projects that interest payments will rise by 55 per cent, from Sh495 billion by June this year to Sh767 billion by 2025, with total debt service costs increasing from Sh623.4 billion by June 2021 (5.6 per cent of the GDP) to Sh1.2 trillion by 2024 (7.9 per cent of the GDP).

The Treasury projected that in the current year, Kenya will spend Sh800.8 billion servicing debts. “Overall, Kenya’s debt remains sustainable but with a high risk of debt distress. The debt ratios were worsened by the Covid-19 pandemic,” it stated.

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