Treasury Kenya Debt

Kenya Set to Ammend Debt Ceiling as Public Debt Nears the Kes. 9 Trillion Mark

Kenya’s National Assembly could be forced to amend the public debt ceiling currently capped at Kes. 9 trillion as debt is projected to hit Kes. 8.8 trillion by June this year.

As the country plots economic recovery after COVID-19 setbacks amid the general election slated for August this year, the Parliamentary Budget Office (PBO) expects Kenya’s public debt to grow to between Kes. 8.6 trillion and Kes. 8.8 trillion within six months.

Kenya’s public debt has risen 19% from June 2020, a growth that has been attributed to infrastructural expenditures and is expected to cost Kenya Kes. 1.36 trillion in debt servicing equivalent to 63% of projected revenue for the fiscal year 2022/2023.

“This reflects an increasingly constrained fiscal space and high debt burden environment. A review of the Medium Term Debt Strategy indicates that costs and risks of debt burden will remain elevated primarily as a result of worsening domestic debt portfolio risk & cost characteristics,” said the Office in the publication.

PBO has hinted that failure to address the increasing debt burden and risks associated with debt servicing could jeopardize Kenya’s economic recovery as desired by the National Treasury.

The debt ceiling which had been instituted to control the country’s appetite for borrowing is expected to be breached in the next financial year as the total debt will amount top 98% of the ceiling by the end of the current fiscal year in June.

PBO is further projecting that the public debt hit Kes. 10 trillion by 2024 which “illustrates the insufficiency of fiscal space to finance the fiscal deficits for FY 2022/23 projected at Kes. 846 billion.” the office said.

“As such, given it is estimated that only up-to Kes. 200 billion of the FY 2022/23 fiscal deficit is financed. Without an amendment to the ceiling, it would imply that the fiscal deficit for FY 2022/23 is naturally capped at the remaining fiscal space provided by the ceiling and balanced budgets have to be maintained over the medium term.”

According to the office, without the amendment of the debt ceiling and adherence to the fiscal consolidation path, fiscal policy will have to be implemented under an increasingly constrained fiscal environment and the desired outcomes may not be achieved.

“In order to maintain fiscal sustainability at such high debt levels, sound fiscal policy/management should work in tandem with economic structural transformation to achieve high economic growth rate. The 10% economic growth rate target under the Vision 2030 Economic Pillar should therefore consider as a critical factor in debt management,” said PBO.

Kenya Fiscal Deficit Widens, Debt Servicing Grows

Nonetheless, the fiscal deficit is estimated to persist but decline from Kes. 846 billion in FY 2022/23 to Kes. 675 billion by the end of the medium term.

On the other hand, debt servicing as a percentage of ordinary revenues is also expected to rise to 67% in the FY 2023/2024.

Treasury will also have to be cautious of rising risks associated with domestic debt which has a higher refinancing risk and interest rate risk exposure.

Analysis by the PBO indicates that despite shifting borrowing from short-term debt instruments to using medium-term to long-term instruments, Kenya’s domestic debt stock has a much lower Average Term to Maturity of 6.9 years compared to external debt maturity of 10.8 years.

Similarly, 25% of domestic debt has a maturity period within one year compared to 5.2% of external debt while the Weighted Average Interest Rate for domestic debt is also higher at 11.1% compared to that of the external debt portfolio at 2.9%.