Kenya could run out of money to repay massive debts
- Odongo Kodongo
Data from Kenya’s central bank show that public debt (total money owed) declined between December 2023 and June 2024.
The drop in external debt – by 15.4 % – over this period does not mean that the country’s overall finances have improved. Rather, it is due to the gains in the value of the , thanks to pervasive state interventions since February 2024.
So high is Kenya’s public debt that servicing it as of June 2024. This is more than double the recommended limit of 30%, making the country’s public debt . This has been the case since at least 2019.
As a finance scholar with that include development finance and economic growth in Africa, I think the high ratio of debt service to revenue leaves Kenya with few options and diminishing time to steer out of trouble.
In this article, I explore possible effects of unsustainable public debt and some ways through which Kenya could mitigate a .
As late as January 2024, the International Monetary Fund (IMF) assessed Kenya’s debt as sustainable, even as it warned that “overall and external ratings for risk of debt distress remained high”. With , the government proposed a raft of tax measures, , aimed at raising additional revenues.
This ignited that forced the government to . Consequently, the country’s tax revenue is expected to suffer a shortfall of (US$2.7 billion) during the 2024/25 fiscal year.
This constricts the government’s ability to repay debt. Despite its falling ability to pay, the government continues to pile up debt. Indeed, as recently as September 2024, senior government officials were in China .
Unless it secures a debt write-off, debt rescheduling, or similar deal to reduce the debt burden, Kenya will almost certainly end in debt default. The country must use every effort to avoid this possibility.
Avoiding debt default
When creditors believe that a country is likely to default, they seek to protect themselves from possible losses. Sometimes they force the government to take austerity measures.
Austerity means reducing public spending on most needs, including education and health, physical infrastructure such as roads, and social programmes such as food subsidies. It may also force a country to raise revenues by increasing taxes or selling state-owned enterprises.
Such measures and on citizens’ quality of life. But countries on the brink of debt default .
Countries at a high risk of default and those that have defaulted usually have their sovereign by rating . Kenya’s sovereign debt rating for example was in August 2024 notwithstanding that the IMF had earlier assessed it as “sustainable”. Sovereign credit ratings represent the confidence that creditors have about a country’s ability to pay its debt.
Rating downgrades lead creditors to demand higher interest rates on loans. Higher interest rates make it expensive for businesses and individuals to borrow. As a result, businesses may collapse, worsening , and individuals may lose their livelihoods.
As economic conditions deteriorate, investors may sell their assets and take their money elsewhere (capital flight). This triggers a drastic fall in asset prices, which may cause some markets, such the stock exchange, to collapse.
People who have money in banks may withdraw large amounts on short notice ().
For banks to make the money available to savers in such unanticipated large amounts, they must sell some of their assets, such as treasury bills. However, because of falling prices, the assets may have to be sold at a loss and .
If the failing banks make up a big part of the banking sector, the country’s financial system may fail altogether (financial crisis).
Kenya’s options
Kenya’s government has several options to avoid public debt default.
1. Dealing with wasteful spending: There is . Weeding it out would reduce debt service needs and the risk of default. To start with, the could be amended to target recurrent spending on things like transport and entertainment, and allocations to spouses of senior government officials.
2. Fiscal policy rules: There is that limiting the amount a country can borrow and its budget deficit may lower the risk of sovereign default. The rules limit what bureaucrats can spend. Kenya has on many occasions .
3. Institutional reform and whistleblowing: Strong institutions play an important role in imposing fiscal discipline. Kenya has an elaborate and framework. But its institutions are largely considered and in need of reform.
For example, the auditor general could hold state officers criminally liable for neglecting their accounting responsibilities. And more legal protection and security would encourage .
4. Boosting tax revenue: Given to the IMF-backed taxation , Kenya has to be more inventive. The government could collect revenue more efficiently, for example, .
5. Off-balance sheet financing: The government can begin to finance more of its development needs through private-public partnerships. But this is a medium term measure; there are still .
Kenya’s creditors can help, too
Kenya could also consider approaching creditors to negotiate . The borrower can do this when a default is imminent but before it occurs. Debt restructuring eases pressure on government finances by reducing periodic repayments.
Another approach is . This typically involves consolidating several obligations into one obligation with a longer repayment period, or changing the debt to a different currency. The government appeared to China as recently as September 2024.
What next
Excessive use of sovereign debt has caused serious economic problems in countries such as and . There are many lessons from such countries that would help Kenya’s government to steer the economy in the right direction and avoid a debt crisis.
, Associate professor, Finance,
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