Kenya should learn from Ghana's tribulations and stop borrowing

Concept of debt burden. [Getty Images]

In December 2022, the International Monetary Fund (IMF) gave the Kenyan economy a clean bill of health. According to the fund, Kenya showed strong resilience against a turbulent global economic backdrop.

Like many economies in sub-Saharan Africa, Kenya faced tight external financing, surging US dollar, volatile international commodity prices and elevated global uncertainties.

However, Kenya’s real GDP grew by 6 per cent in the first half of 2022 despite a biting drought while tax overperformance and a strong commitment to its IMF programme helped contain risks.

After a fourth review of Kenya’s economic recovery programme, the IMF praised the new Kenyan leader, President William Ruto, for staying the course of fiscal consolidation and for his strong emphasis on tax revenue despite pressures from delayed, unbudgeted, and emergency spending.

The government has projected a growth of 6 per cent for FY 2022/2023 against a backdrop of an economy recovering from the Covid-19 pandemic, rising costs of debt, projected drought, rising cost of goods, among other factors.

The government plans to achieve its growth target through an aggressive revenue generation and has projected to increase its ordinary revenue from Sh1.81 trillion (US$14.5 billion) to Sh2.14 trillion (US$17 billion), equivalent to 15.3 per cent of the country’s GDP.

On expenditure, Kenya intends to increase its total expenditure from Sh3.2 trillion in FY 21/22 to Sh3.34 trillion in FY 22/23. The Kenyan government has projected a fiscal deficit of Sh862 million (6 per cent to the GDP) in FY 2022/23.

To achieve this, the government intends to restrict growth in recurrent spending through reduction of non-priority expenditure and re-double efforts on revenue collections.

Recent data from the Central Bank of Kenya (CBK) shows that Kenya’s public debt has hit Sh9.145 trillion ($73 billion), equivalent to 62.3 per cent of GDP, made up of Sh4.472 trillion ($36 billion) in domestic debt, Sh37.88 billion ($303 million) publicly guaranteed debt, and Sh4.673 trillion ($37 billion) in external debt.

Kenya’s debt stock is gradually inching closer to the Sh10 trillion ($80 billion) ceiling set by Parliament in June last year. Repayment of billions of bilateral and commercial loans has also taken a heavy toll on the country’s foreign-exchange reserves.

The country’s reserves have depleted to its lowest level in 88 months at $7 billion (SES870.7 billion, equivalent to 3.92 months of imports), according the CBK. The reserves fell from $7.38 billion, or 4.13 months of estimated imports, on January 19 and $9.62 or import cover of 5.89 months on September 5, 2021

There are also concerns that the new administration is focused more on raising revenue through taxes instead of rationalising its expenditure. Kenya’s recent supplementary budget submitted to Parliament showed an increase in the overall spending from Sh3.36 trillion (US$26.8 billion) in the original budget presented to Parliament in April 2022 to Sh3.37 trillion (US$ 26.9 billion).

Interest in Kenya’s bonds has soared over the past months. Yields on Kenyan Eurobonds have shrunk by up to 51 per cent since July 2022. This puts the East African nation in better position to access external commercial financing.

However, the country’s debt stock, which is almost at the ceiling set by its legislature should be of concern to investors. The Kenyan shilling weakened 9 per cent against the dollar last year and has increased the pressure on the country’s external debt repayment.

The fall in Kenya’s hard currency reserves is also an indication that the government has started servicing its foreign debt from its reserves, which is also not a sign of a healthy economy.

Ghana’s economy was seen as the rising star in Africa untill the ravages of the Covid-19 pandemic and recent geopolitical developments exposed how weak the country’s fundamentals were.

Currently with the highest number of debt securities on the European bond market, Ghana’s economic woes started getting worse from 2021 when international credit rating agencies exposed how unsustainable the country’s debt levels were.

Ghana is now seeking a bailout from the IMF and is currently facing an uphill task of restructuring its GHC575 billion (US$49 billion), over 100 per cent of its GDP, to be able to secure an IMF board-level approval.

The country’s reserves are depleting, and the Ghanaian authorities want to convert an estimated 40 billion cedis ($3.3 billion) of loans owed to the Bank of Ghana into long-term bonds to reduce the debt burden on the country. Kenya needs to draw lessons from the developments in Ghana and reduce its debts.

Although Kenya has not gone completely off the rail, the nation should be guided by the situation in Ghana and put a break on the borrowing.

The IMF programme has positioned Kenya on a sound footing. However, the Kenyan authorities need to focus on the targets set under the IMF deal and put measures in place to whip up investor confidence in the Kenyan economy.