How debt, inflation and fiscal deficit have crippled economic expansion

A shopper buys maize flour at a supermarket. Inflation has seen the cost of food products rise sharply. [Boniface Okendo, Standard]

A public policy think tank has unearthed how Kenya’s macroeconomic status is derailing the country’s economic transformation.

The Kenya Institute for Public Policy Research and Analysis (Kippra), details how fluctuations in this dimension of the economy end up affecting local production and foreign investments. 

The country’s debt burden, inflation rate and the challenge of fiscal deficit are the sparks of the broader macroeconomic challenge the economy has.

Macroeconomic stability is one of the dimensions the think tank has used to detail Kenya’s economic transformation progress between 2010 and 2020.

Other dimensions are: environmental conservation, essential infrastructure, Information Communication and Technology and innovations, human capital and growth in productivity. 

The paper describes economic transformation as a process that encapsulates higher productivity among sectors in the economy, leading to overall economic growth and improvement in the quality of life of citizens (UN SDG, 2020).

It notes that Kenya’s economic transformation is spearheaded by the Kenya Vision 2030, national policies, and international and regional commitments that serve as the blueprints for strategies that are focused on transformation.

Of these dimensions, macroeconomic stability scored the lowest (0.32). ICT and innovation scored the highest(0.63) followed by human capital(0.62) while essential infrastructure scored 0.45. 

Environmental conservation had a score of 0.35 and 0.51 for productivity. The scores range from 0 to 1. Closer to one signifies a better score. Kenya had a score of 0.48. 

The cause for the low score in macroeconomic stability, Kippra shows in the latest discussion paper, is caused by the country’s debt status, runaway inflation and fiscal deficit. 

The best score during the period under review was in 2010 which stood at 0.48 while the worst was 0.14 in 2017.
In 2020, the score was 0.33.

“Macroeconomic stability bears low scores in the index, which can be attributed to Kenya’s external debt and inflation, which have been increasing over the years,” Kippra explains. 

Kippra in its computation of how macroeconomic stability performed over the years used four indicators. These are: inflation rate, external debt as a percentage of gross domestic product (GDP), fiscal deficit as a percentage of GDP, and current account balance as a percentage of GDP.

The paper is titled Tracking Economic Transformation for Sustainable Development in Kenya and was published on September 13, 2023.

External debt score

On the external debt score (as a percentage of GDP), Kippra cites a recommendation of the International Monetary Fund of 40 per cent for debt sustainability. 

“Kenya’s external debt score has been declining during the period 2010 to 2020. This implies that the country’s external debt has been rising over the years, and consequently affecting opportunities for economic growth through investments,” the paper reads. 

It documents that in 2020, Kenya’s external debt as a percentage of GDP was 39.2 per cent, almost going beyond the target of 40 per cent.

The IMF benchmark of a fiscal deficit of three per cent as path to debt sustainability was also referenced. 

The paper shows fiscal deficit (difference between total revenue and total expenditure of the government ) has been fluctuating from 0.31 per cent in 2010 to 0.22 per cent in 2020. 

“The fiscal deficit has been fluctuating over the years with a steep decline experienced from 2011 to 2015 signifying increased fiscal deficit thus paving way for increased borrowing. Kenya’s fiscal deficit was within the threshold of three per cent except for 2015 and 2017,” the paper reads. 

The account balance indicator, the paper indicates, experienced a decline from 2010 to 2014 and later a gradual rise from 2014 to 2020.

“However, the scores are low, implying that Kenya’s value of imports is higher than that of exports, necessitating the need for strategies to accelerate trade competitiveness,” the paper notes. 

The inflation during the period under review closed with a score of 0.22 having opened in 2010 with 0.53.

The 2020 Covid-19 pandemic has been partly to blame. 

“There was a sharp rise in inflation scores in 2018, demonstrating a decline in inflation. However, the steady decline was short-lived as the Covid-19 pandemic led to economic downturn through decrease in production and therefore increased inflation in 2020,” the paper reads.

Kippra states that macroeconomic stability as a dimension has experienced variation across the years, and consequently affecting investments that may spur productivity across various sectors.

“Inflation rates, external debt, current account balance and fiscal deficit play a critical role in provision of a stable macroeconomic environment necessary for increased productivity,” it states. 

Kippra has further called for stability in the macroeconomic environment in order to maintain growth friendly and stable fiscal policy and accommodative monetary policy with price stability.

“Also, develop and implement strategies that advance local production to enhance revenue mobilisation, increase export growth and serve as a catalyst for increased investment opportunities,” recommends the think tank.