By STANDARD REPORTER

When the government receives the Sh425 billion promised by China, the Asian tiger will topple Japan as Kenya’s largest bilateral lender.

The International Development Association (IDA), an arm of the World Bank that funds the world’s poorest countries, is currently Kenya’s largest multilateral lender at Sh321.9 billion ($3.7 billion). This represents 38.2 per cent of total external debt.

The Africa Development Bank (AfDB) and IMF follow with loans of Sh75.3 billion and Sh67.4 billion, respectively, as at December 2012.

Data from the National Treasury shows the debt owed to Japan amounted to Sh87.5 billion ($1.0 billion) at the end of May, compared to Sh61.3 billion owed to China. Last week’s deal will push China’s credit higher.

Other financiers are France and Germany, with credit of Sh45.6 billion and Sh25.5 billion, respectively.

The government has adopted a strategy of restricting public debt to concessional loans. However, a review of the current public debt shows it has in recent times financed its deficit with an increasing proportion of domestic debt.

Kenya’s public debt hit 51.7 per cent of national output in the year to June, up from 44.5 per cent the previous year, raising questions on the likely yield required for future external borrowing.

Total public debt rose 16 per cent to Sh1.89 trillion in the last fiscal year to June.

“This presents the risk that the country may find it difficult to service the debt in future under modest economic growth rates and underperformance of revenue. The current debt level of about 50 per cent of GDP is unsustainable going forward,” noted a Parliamentary Budget Office report released recently.

Treasury has in the past said it aims to reduce its ratio of debt to gross domestic product from around 45 per cent in the medium term.

However, Kenya is likely to hit Sh2 trillion in debt this financial year as the state has to plug a deficit of Sh329 billion, or 7.9 per cent of GDP, from both foreign and domestic sources. The government plans to spend Sh1.6 trillion.

Treasury plans to finance the deficit through foreign financing and borrowing from the domestic market.