Debt to increase in polls year, economists warn

Kenya’s level of public debt is likely to rise even higher as the country prepares for the 2017 elections, economists have warned.

They added that Kenya’s debt as a percentage of GDP is already ranked the highest among the main African economies, having surpassed South Africa in 2013.

“The Government cuts needed to help reduce Kenya’s fiscal deficit, as outlined in the Budget Policy Statement, are politically tricky and unlikely to happen before the August 2017 elections,” said Mark Bohlund, an economist with Bloomberg Intelligence.

Costs of repayment

Data from the 2016 edition of the Economic Survey released last week indicates that the Government’s outstanding debt grew by 17.3 per cent to Sh2.6 trillion in June 2015.

Out of this, external debt amounted to Sh1.4 trillion, of which Sh270 billion was attributed to the sovereign bond the country floated in 2014.

Further, the cost of servicing the debt in relation to the country’s foreign export earnings grew from 9.9 per cent in the 2013-14 financial year to 11 per cent in 2014-15.

The Treasury is now being warned that interventions to stop a further widening of the fiscal deficit and debt might yield little fruit, owing to a significant public wage bill.

“This means that Kenya will maintain a large budget deficit, pushing Government debt further above 50 per cent of GDP,” said Mr Bohlund.

“With the majority owed to external creditors, this increases the risk of balance-of-payments shocks and currency depreciation.”

This could lead to another round of interest rate hikes if the Central Bank of Kenya (CBK) takes the policy directive to raise the benchmark lending rate to steady the local currency against any perceived shocks as happened last year.

On Tuesday, the International Monetary Fund (IMF) warned that Kenya needs to continue with reforms in public financial management and devolution to sustain debt repayments.

“It will be important to undertake a growth-friendly reduction in fiscal deficits over the medium term to maintain debt sustainability and reduce external current account deficits,” said David Lipton, IMF’s first deputy managing director, while on a two-day his visit to Kenya.

“To this end, we support the Government’s effort to strengthen revenue mobilisation, review its expenditure priorities, and increase the quality of expenditures.”