Kenya has breached its public debt ceiling – how it got there and what that means
Published on: September 21, 2022 07:43 (EAT)
- The new administration says the country is broke but Kenya is already living beyond its means and the World Bank has warned of a high risk of debt default.
- A public debt ceiling is a legally imposed upper limit on the stock of public debt of a country.
By The Conversation
newly elected president, William Ruto, has earned more legal space to borrow
for his grandiose economic plan after parliament recently
raised the country’s public debt ceiling to KSh10 trillion (US$100
billion). The new administration says the country is broke but Kenya is
already living beyond its means and the World Bank has warned of a high risk of debt default. We asked Odongo
Kodongo, a finance scholar, to explain the debt ceiling and why Kenya needs to
pay more attention to it.
is the debt ceiling?
let’s understand what public debt is. Article 214(2) of the constitution of Kenya defines public debt
as all financial obligations arising from loans
raised or guaranteed and securities issued or guaranteed by the national
government. Governments need to borrow money to pay their bills when they
cannot fund all their activities using its revenues alone.
public debt ceiling is a legally imposed upper limit on the stock of public
debt of a country. For emerging and developing economies, a debt limit of no
more than 64% of the country’s production (gross domestic product or GDP) is recommended. In Kenya, the public debt ceiling is
anchored by the Public Finance Management Act of 2012.
50(2) of the Act caps national government borrowing to a limit set by the
national assembly. This clause was recently amended to allow the government
to exceed the limit under certain circumstances. The circumstances include
depreciation of the shilling, material balance of payments imbalances, or fiscal
disruptions caused by wars, health pandemics, or national disasters.
Another amendment gives the Public Debt Management
Office the responsibility to advise the national assembly on an annual
borrowing limit. Thus, the government now has the flexibility to adjust the
borrowing limit every year.
concern is that the flexibility introduced by these new amendments can be
abused by an irresponsible government.
all is not lost. Before exploiting this flexibility, the Treasury cabinet
secretary must explain the circumstances to the national assembly and provide a
time-bound plan for remedying the breach of the ceiling. Thus, all would be
well if the national assembly cannot be unduly influenced by the executive.
much is Kenya’s public debt ceiling?
government finances are governed by the Public Finance Management (National Government)
Regulations of 2015, which set the ceiling at 50% of the present
value of GDP. The national Treasury has recently proposed to change the limit
proposed change translates to a debt ceiling of about KSh8.579 trillion for
2022. This figure is calculated from the official forecast for 2021 economic production of KSh12.1
trillion and its projected growth rate of 5.9% during
has already broken through the proposed ceiling. The national Treasury estimates the present value of
Kenya’s public debt as a proportion of GDP for 2022 at 64.2%. This figure is
higher than the proposed ceiling of 55%.
high debt usage has driven the cost of annual debt servicing to
almost 54% of domestic revenues. This is an increment of 14% compared to 2020 when
the ratio was about 40%.
are the recent warning signs?
the high proportion of revenues that debt servicing gobbles up, the government
appears to be borrowing beyond the country’s means. Increasingly, concerns are also being raised about the
shifting composition of public debt in favour of external debt (lenders outside
Kenya.) External debt burden is usually heavier because it depletes the country
of foreign exchange reserves. This may trigger a fall in the value of the
of June 2022, external debt constituted about 50% of total public debt,
up from 45% as of March 2013. The more expensive commercial debt comprised more
than 25% of the external debt as of June 2022.
real terms, the external debt burden has worsened due to the persistent fall in the value of the Kenya shilling and
the economic slump that followed the COVID-19 restrictions.
worsening overall debt burden has prompted the International Monetary Fund to downgrade the country’s debt risk from
moderate to high in 2020 just two years after downgrading it from low to
moderate in 2018. The downgrade of a country’s debt risk makes it more
expensive for the country to borrow, leaving it with less to spend on other
did Kenya get to this point?
has not witnessed such high levels of indebtedness in recent history. The country’s growing debt
burden has been attributed to many causes. First, official sources point to high
infrastructure spending, increased recurrent expenditures (payment of regular
expenses like public wages and interest on loans), revenue collection
shortfalls, and constraints in institutional capacity for public expenditure
increased reliance on commercial external debt with short tenors (debt that
must be repaid quickly) has put pressure on government to refinance at short
intervals and on worsening terms. In other words, an existing debt must be
replaced with new debt at a higher interest rate. The higher rate signals that lenders
now have more doubts about getting their money back.
June this year, the government had to abandon a planned KSh115
billion Eurobond issuance because yields had increased beyond 12.5%, meaning
that it would have been too expensive to repay.
the government has blamed unanticipated economic shocks such as drought and
COVID-19. Fourth, critics have cited financial impropriety as
another possible reason. They point out that the growth in infrastructure and
welfare spending does not match the growth in debt since 2013 and that there are no proper records of debt spending.
does the debt ceiling matter?
are imposed to ensure that countries employ public debt sustainably. Debt
sustainability is about the ability of a country’s current and expected future
income to cover debt servicing costs.
breach of the debt ceiling signals the possibility that the country’s debt
could be excessive and unsustainable.
debt is regarded as excessive if it substantially
reduces the amount of goods and services available to future generations, and
if the country could lose or only have reduced access to financing.
public debt has several economic consequences. First, servicing the debt
reduces resources available for funding the government’s other programmes.
Second, it means government cannot afford to stimulate economic activity by, for example, lowering taxes, or to provide
welfare support to citizens. An example of welfare support is cash payments to
dependants of dead retirees.
government borrowing essentially transfers wealth from the poor,
who must pay increased taxes for debt repayment, to the rich, who lend money to
the government and earn interest from it. Excessive public debt therefore
widens the welfare divide between the rich and the poor.
Fourth, research suggests that excessive public
debt negatively affects long-run economic growth.
one of the most painful consequences of excessive debt is possible default as
has recently happened to Argentina and Zambia. Debt default could result in loss of
sovereignty as creditors demand austerity measures (budget cuts) as part of any
debt restructuring deal. Kenya needs to draw some lessons from such undesirable
by Odongo Kodongo; Associate professor, Finance,
University of the Witwatersrand]