DEFICIT: The government is considering a fiscal consolidation policy to reduce the deficit and curb debt accumulation as Kenya’s total public debt surged to Sh10.56 trillion.
This is an increase from Sh10.28 trillion in June 2023, representing 72 per cent of the gross domestic product (GDP) at current prices for that period. In the medium term, the government plans to reduce the fiscal deficit from 5.6 per cent of GDP in the FY 2023/24 to 3.0 per cent of GDP
“The reduction in fiscal deficit will enhance the primary surplus, thereby stabilising public debt over the medium term,” according to the Macro Economic Outlook for the Medium-Term Budget.
The latest report from the Office of the Controller of Budget (CoB) highlights that as of June 30, 2024, Kenya’s public debt stood at Sh10.56 trillion, which is 65 per cent of GDP at current prices.
Public debt, which refers to the amounts borrowed by the government to finance deficits, has become a growing concern as spending outpaces revenue collection.
Revised estimates
“Total expenditure on public debt in Financial Year (FY) 2023/24 was Sh1.59 trillion, representing 89 per cent of the revised annual estimates, compared to Sh1.15 trillion, which represented 83 per cent of the revised estimates in FY 2022/23,” the report states.
The debt expenditure was broken down into Sh834.85 billion for principal repayments, Sh750.41 billion for interest payments, Sh1.58 billion in commitment fees, and Sh361.71 million for other charges. The cost of external debt is influenced by various factors, including interest rates, commitment fees, and penalties, all of which are exacerbated by exchange rate fluctuations.
As Kenya’s external debt is largely dominated in foreign currencies, the weakening of the Kenyan shilling drives up debt costs. For example, the exchange rate shifted from an average of Sh117.9 per US dollar in July 2022 to Sh141.4 per dollar in June 2023, and reached Sh159.7 per dollar in January 2024 before appreciating to Sh129.4 per dollar in June 2024. On the domestic front, rising interest rates have contributed to an increase in the cost of borrowing. The Central Bank’s rate increased from 7.5 per cent in July 2022 to 13.0 per cent by June 2024. This led to a significant rise in the interest rate for the 91-day Treasury Bill, which went from 8.097 per cent in July 2023 to 15.9716 per cent by June 2024, marking a 97 per cent increase.
Kenya’s growing public debt has raised concerns about its impact on economic growth.
According to a study by the International Monetary Fund (IMF), an unexpected 1 per cent increase in the debt-to-GDP ratio leads to a 0.01 per cent decrease in real GDP three years after the shock.
While the short-term impact of debt increases on GDP is not statistically significant, the negative effects become apparent over time.
To address the rising cost of public debt, the Controller of Budget has urged the National Treasury to regularly review the factors influencing both internal and external debt, including interest rates and exchange rate movements. The need for, urgency, and sustainability of public debt should be reassessed, ensuring it aligns with Section 15 of the Public Finance Management Act 2012.
