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For every Sh100 collected by Kenya Revenue Authority (KRA), only Sh22 is left for development, paying pensioners and transfer to the county governments. According to experts the ratio of debt service on loans to tax revenues collected currently stands at over 50 per cent, meaning that Sh50 out of every Sh100 collected by KRA goes to pay interest on debt, while Sh28 out of every Sh100 is reserved for settling the public wage bill, which currently stands at $7.1 billion (Sh1.024 trillion) and above the 35 per cent threshold.

This not only affects development but puts pressure on Kenya to meet other obligations by growing the debt portfolio which has hit Sh10.3 trillion, comprising Sh4.8 trillion domestically sourced and Sh5.5 trillion from the external market, as per the latest data from the Quarterly Economic and Budget Review Report.

Exchange rate fluctuations

In the report covering the Financial Year 2022/2023, the surge in debt is attributed to an increase in external loan disbursements, exchange rate fluctuations and the uptake of domestic and external debt during the period.

“The gross public debt as of 30th June 2023 increased by Sh1,560.5 billion to Sh10,189.5 billion compared to Sh8,629.0 billion as at end of June 2022,” the report stated, indicating a breach in the public debt ceiling capped at 55 per cent of the country’s gross domestic product (GDP).

Ronny Chokaa, a macroeconomics analyst with Investment Banker’s Genghis Capital Ltd said the public debt to GDP ratio, which now stands at 65 per cent, is a red flag to Treasury mandarins indicating an increased risk of distress and a lower potential for growth. Ratios above 77 per cent can reduce economic growth and cause financial instability.

“For a developing economy like Kenya’s, if the debt level is too high, and above the threshold, it is unsustainable. Currently, Kenya’s debt-to-GDP ratio is 65 per cent. It shows that we are in the red zone now,” Chokaa said.

According to the report, Kenya’s fiscal balance excluding grants (on a commitment basis) amounted to a deficit of Sh857.7 billion (5.9 per cent of GDP), at the end of June 2023 as compared to a target of Sh887.9 billion (6.1 per cent of GDP).

The net foreign financing amounted to Sh310.8 billion (2.1 per cent of the GDP) during the period ending June 30th June 2023, while net domestic funding amounted to a net borrowing of Sh459.5 billion or 3.2 per cent of GDP during the period. By the end of June 2023, the total cumulative debt service payments to external creditors amounted to Sh391.6 billion.

This comprised of Sh237.4 billion (60.6 per cent) principal and Sh154.2 billion (39.4 per cent) interest. According to the report, the national government’s cumulative revenue collection including A-I-A during the period was Sh2.4 trillion or 16.3 per cent of GDP against a target of Sh2.5 trillion, falling short of target due to shortfalls recorded in the collection of both ordinary revenue and ministerial appropriation-in-aid.

External debt position

Chokaa said the exchange rate fluctuations were also a risk, as “it extrapolates our external debt position.” During the review period, the foreign exchange market largely remained stable despite the tight global financial conditions attributed to the strengthening of the US dollar and uncertainties regarding the ongoing Russian-Ukraine conflict.

“Due to the strong dollar, the exchange rate to the Kenya shilling like with all world currencies has weakened to exchange at Sh139.7 in June 2023 compared to Sh117.3 in June 2022