Reality check after Kenya breaches Sh10tr debt ceiling

Treasury CS Njuguna Ndungu poses a photo before presenting the 2023/24 budget highlights at Parliament June 15, 2023. [Boniface Okendo, Standard]

The Senate is expected to vote on the Treasury’s request to raise the public debt ceiling to a percentage of gross domestic product (GDP) rather than a specific number.

This will happen when the House resumes from recess next week.

The National Assembly earlier approved the conversion of Kenya’s debt ceiling from the current Sh10 trillion to a debt anchor as a percentage of the GDP.

The debt-to-GDP ratio is the metric comparing a country’s public debt to its gross domestic product (GDP).

By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts.

Often expressed as a percentage, this ratio can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default, which could cause a financial panic in the domestic and international markets.

A country able to continue paying interest on its debt—without refinancing, and without hampering economic growth—is generally considered to be stable.

A country with a high debt-to-GDP ratio typically has trouble paying off external debts.

In such scenarios, creditors seek higher interest rates when lending.

The total public debt is now at Sh9.4 trillion as both domestic and external liabilities continue to rise rapidly.

The National Treasury yesterday released the updated figures as it warned the country is headed for a financial crisis unless Parliament accedes to its request to raise the debt ceiling beyond the Sh10 trillion limit.

At Sh9.4 trillion, the William Ruto government has a tiny window of borrowing only Sh600 billion to fund its national programmes.

“As at the end of March 2023, the total disbursed outstanding public debt stood at Sh9.4 trillion against a public debt limit of Sh10 trillion,” said Treasury Cabinet Secretary Njuguna Ndung’u during a meeting with parliamentary committees in Nairobi.

Domestic debt

Prof Ndung’u said domestic debt stood at Sh4.55 trillion as of March 30, the highest level it has reached, while external debt substantially exceeded Sh4.85 trillion after the depreciation of the local currency in the recent past, and fresh borrowings.

“The debt stock remains sustainable but with a high risk of debt distress,” he said.

Kenya’s public debt grew by nearly Sh700 billion in the six months to March this year under President Ruto’s government, pointing to a sustained borrowing appetite.

This is amid growing concerns that the country could be headed to a full-blown debt crisis.

MPs role in Kenya's ballooning debt as ceiling races past Sh10tr

The share of external debt is expected to rise further if the International Monetary Fund disburses billions of shillings that Kenya has sought from the multilateral lender to cope with a financial crunch.

CS Ndung’u said Treasury has a budget deficit of Sh720 billion in the next financial year that starts in July, signalling the country is set for financial trouble if the Sh10 trillion debt ceiling is breached.

“The National Treasury requests Parliament to approve the replacement of the current debt ceiling of Sh10 trillion with a debt limit of 55 per cent of the gross domestic product, (GDP)” he said.

The ceiling established by Parliament is the maximum amount the government can borrow.

Though the Budget and Appropriations Committee raised concerns about pegging the debt ceiling on GDP, the CS maintained that government and policymaking must be solution-oriented and strive to meet the needs of the economy.  

“We have business cycles, and we can also see political cycles, and somehow political cycles can actually coordinate business cycles,” he said.

“When we are anticipating elections to come in this country or even countries in this region, nobody wants to borrow long-term, everybody wants to borrow short-term. 

“Everybody moved to 91-day bills and one-year debt, so after one year when the elections are resolved, then you find the lumping up maturities and by the time you adjust yourself, you have to face this kind of liquidity issue.

“So you cannot say that we cannot form future policies because we are having liquidity issues.”

If the debt ceiling is not raised, further borrowing will not be possible, dealing a blow to the government’s national programmes.

Ndung’u said the world is not coming to an end, “it is a continuous process of redefining ourselves.”

“The market is also pricing itself, re-organising itself in terms of portfolio, they’re moving away from the short term and now they’re seeing there is a future.”