In order to understand Kenya’s debt, it is important to know who Kenya is borrowing from. The source of a country’s debt can be external or internal. Internal debt is usually from the central bank, commercial banks or non financial institutions. This debt is usually in the form of local currency. 

External borrowing which is owed to foreign creditors can be from bilateral, multilateral or commercial banks. Suppliers credits also count as debt. In addition, debt can be concessional or semi concessional. In the former case, the interest rates are lower than market rate and sometimes have longer repayment periods and in the latter, the interest rates are maintained at market rate but repayment periods are longer. 

Striking the golden mean is key to maintaining a healthy balance. In January this year, Kenya’s total debt stood at Kshs. 9.18 trillion with a public debt to GDP ratio of 62%. The threshold set by the law through the Public Finance Act is a public debt to GDP ratio of 52%.  Kenyan debt is predicted to pass the Kshs. 10 trillion mark by June next year according to a 2023 Public Finance Management Regulation Amendments report presented by the Parliamentary Budget Office (PBO) to the National Assembly Public Debt and Privatisation Committee. Due to this fact, the Cabinet Secretary of the Treasury is set to seek an amendment of the debt ceiling for the 7th time in the last 10 years. 

The balance of Kenya’s debt shifts more towards external sources due to the issuing of sovereign eurobonds to finance huge infrastructure projects in the country. It has also been shifting from multilateral to commercial sources in the form of syndicated loans. This poses several risks in the form of currency risk due to foreign denominated debt. If Kenya’s currency depreciates, as it has done in the last few months, against the foreign currency, the cost of servicing the debt increases, placing budgetary constraints on the government’s budget. 

This in turn can lead to a default risk which would damage Kenya’s reputation on the foreign markets. Fitch in July this year revised Kenya’s Issuer Default Rating (IDR) to negative from stable highlighting an increase in the probability of default. 

The shift also exposes Kenya to dependency on global conditions and crowds out domestic borrowing as the government dedicates a large portion of the budget to debt servicing instead of growing local industries. The government also weakens the domestic currency if it prints more money in order to pay off debt and in the process increases inflation and erodes local purchasing power. It is an unending cycle of borrowing to pay off older debts.

Another problem has been the inability of county governments to generate their own source revenue instead relying on disbursements from the national government to fund their own budgets. There is also poor understanding of fiscal matters with many irregularities reported at the county level with regard to their budgets. 

Unfortunately, there is little probing by the bicameral Parliament which plays an oversight role on the Medium Term Debt Management Strategy and while Kenya is a signatory to the East Africa Economic Converge Criteria which sets debt ceilings in the region which is all for debt sustainability through fiscal consolidation, Kenya is yet to show signs of taking these discretionary measures seriously through fiscal discipline.