Domestic markets to carry the load of Kenya’s debt

In its 2022 pre-election, economic and fiscal report submitted to Parliament last week, the exchequer has warned of fiscal risks associated with debt service.

“Debt market instability, both domestic and international, may lead to increased cost of debt through elevated interest rates. To cushion the country, the government is deepening reforms in the domestic debt market to ensure a stable and strong financial system capable of funding a significant share of the fiscal deficit,” the National Treasury noted.

More than half of Kenya’s debt or 52 per cent is denominated in foreign currency posing re-financing risks in the event of the depreciation of the Shilling.

“Exchange rate depreciation could lead to an increase in debt service beyond what is budgeted for in the Consolidated Fund Services (CFS),” added the exchequer.

The National Treasury has already prioritized local borrowing over external financing for the fiscal year to June 30.

Data from the National Treasury Statement of Actual Revenues and Net Exchequer Issues as of April 28 shows actual receipts from domestic borrowing at Ksh.735 billion for the 10 months of the fiscal year since July 2021.

Receipts from external loans and grants stood at Ksh.162.5 billion and are projected to reach Ksh.433.2 billion by June 30.

Domestic borrowing receipts have meanwhile been tabulated at Ksh.1.008 trillion in the same period.

The fiscal deficit has been projected at 8.1 per cent of GDP in the fiscal year to June and is expected to decline to 6.2 per cent of GDP in the 2022/23 financial year.