Pull out all the stops to forestall disastrous debt default

Treasury CS Njuguna Ndung'u. [File, Standard]

Article 214 (2) of the Constitution defines public debt as “all financial obligations attendant to loans raised or guaranteed and securities issued or guaranteed by the national government.”

Debt, when taken and invested prudently, is a catalyst for development. The converse holds true. When a country takes on more debt than it can possibly repay, debt default follows.

Debt default, simply defined, is a failure by a country’s government to pay its debt. Kenya has accumulated a huge debt stock that is denominated in foreign currency. It is now among 23 low-income countries in Africa considered to have unsustainable debt burdens. There is a possibility of debt default if the country is unable to repay a 10-year Eurobond worth USD 2 billion which matures in June 2024.

There are other tell-tale signs that point to Kenya’s dire economic and financial straits. Debt as a ratio of GDP is at 70 per cent against the IMF-recommended threshold of 50 per cent. Data from the Treasury and the Central Bank of Kenya reveals that Kenya’s debt stock stood at Sh10.189 trillion at the end of June 2023. This is a breach of the Sh10 trillion ceiling set by Parliament in June last year. 

Government salaries for civil servants were delayed in April this year because of “an operational liquidity crunch” according to David Ndii, chair of the President’s Council of Economic Advisors.

Dr Ndii explained that this was caused by “unusually heavy maturities in March where the government paid Sh150 billion in maturing bonds and bills.” More recently, data from the Treasury shows the government spent Sh161.84 billion on debt repayments in July against receipts from taxes and non-tax revenue of Sh156.94 billion.

The foregoing shows that Kenya is on the slippery slope to debt default. There are ramifications, the most obvious of which is the erosion of trust in government securities and currency. When a government’s securities can no longer be trusted, it means that it can no longer issue bonds in exchange for debt. Its bonds are relegated to junk status meaning any lending to the government is considered only at very high interest rates to mitigate the risk of default.

The Kenya shilling is fiat currency meaning it is not backed by a commodity. It is backed by faith and trust in the government which issues it. When that trust is broken, the shilling is denuded of the primary functions of money as a medium of exchange, a store of value and a unit of account.

In 2009, the Zimbabwe dollar was abolished and replaced mainly by the US dollar. This is because the Zimbabwe dollar could no longer be trusted as a store of value on account of hyperinflation. Sri Lanka defaulted on its sovereign debt last year. This led to rising prices as the local currency depreciated while incomes remained unchanged. According to the World Bank, “the poverty rate has doubled from 13 per cent in 2021 to 25 per cent presently.”

In Kenya, banks are big holders of government debt. Should the government default, many banks will become insolvent. The country is facing an existential crisis. It needs all hands on the deck to forestall debt default.

-Mr Khafafa is a public policy analyst