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High debt weakens investment outlook, bank warns

By Wainaina Wambu | February 7th 2020

Kenya’s debt burden might weaken the government’s response to shocks,  NCBA Group Managing Director John Gachora has warned.

Speaking during the release of the NCBA Economic Outlook 2020, Mr Gachora said the debt might deal a blow to the investment landscape.

“Debt levels have appreciably risen and besides devoting a considerable portion of national income to debt servicing, the burden may impair policy-makers’ response to shocks which may continue to dampen the investment landscape,” he said.

“Necessary adjustments should be careful and deliberative to allow businesses and individuals time to adjust to any changes in government programmes and tax policies.”

According to the outlook, investors are wary of the “destabilising effects” mounted by public debt concerns with debt to GDP ratio rising to more than 60 per cent from 49 per cent over five years ago. It said the reduction of debt while at the same time maintaining growth and stability would need “some delicate and potentially painful policy balancing”.

Outpaced growth

“A sustainable equilibrium may require a combination of growing incomes, public expenditure rationalisation, declining debt levels, and robust economic growth,” said the report.

NCBA noted that the government has laid out a fiscal consolidation plan but said it was hesitant in making “material adjustments” to the public wage bill and expand the tax base. 

Public debt has outpaced growth in the national outcome, said the report, thus increasing the debt burden and hence the fiscal consolidation may slow economic growth.

“The pains of spending cuts at a time when business confidence is fragile and individual incomes weak may slow economic activity in the short term, potentially proving self-defeating,” it said.

It offered the option of government increasing taxes for the wealthy to redistribute wealth, which it however noted was almost impossible.

“The chances of having it passed through parliament are considerably slim especially on the backdrop of a deeply polarised ruling party,” said the bank.

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