Kenya Kwanza administration’s first full 2023/24 financial year kicked off with a Sh78 billion debt repayment made in July alone, underlining the burden of existing loans amid a push to overhaul public debt ceiling policy.

This was on the backdrop of revelation by the National Treasury Cabinet Secretary Njuguna Ndung’u that the government is uncertain of the momentum of economic growth, a determinant in establishing the country’s debt-carrying capacity if the proposed debt ceiling policy sails through.

The current budget that started last month was prepared on the assumption Kenya will eventually switch the debt ceiling from the current Sh10 trillion numerical number to a debt anchor of 55 per cent relative to gross domestic product (GDP).

Switching to a debt anchor, which Ndung’u describes as “tying of own hands,” will allow the government to move its borrowing targets based on the country’s economic performance, meaning a better economy offers space to absorb more debt.

Kenya’s debt as a ratio to GDP is currently at 71 per cent, way above the recommended 55 per cent ratio but the Treasury has previously defended this, arguing the ratio has not taken into consideration debt sustainability management aspects being implemented by the current regime.

Ndung’u told the Senate Standing Committee on Finance and Budget that the government is struggling to raise tax revenues, forcing it to at times forego salary payments in favour of servicing monthly debt obligations.

“We pay the debt every month because they come into recurrent expenditure. In the month of July alone, we paid Sh78 billion in terms of debt. So, everything else stands to wait until we clear it (monthly repayment),” Ndung’u said.

The cost of servicing debts, mainly to China, has lately heightened due to the weakening shilling against major foreign currencies. Kenya spent Sh815.4 billion on debt repayments between July 2022 and March 2023.

Resource availability
Ruto’s administration, cornered in the tough act of resource availability and spending pressures, will borrow Sh718 billion in 2023/24 financial year to fund the budget gap.

This is against a borrowing headroom of just Sh300 billion unless the shift to debt anchor as contained in the draft Public Finance Management Regulations 2023, is quickly implemented. The current Sh10 trillion numerical ceiling is subjective and requires periodic upward adjustment as the size of the budget deficit increases every budget cycle.

In keeping with the regime’s promise of uplifting the less privileged and growing the GDP, the government is prioritising supporting agriculture and small business, among other three key sectors despite lingering uncertainty.

“The policy measure we have is to grow the cake (economy). The bottom-line is to say if you want higher debt in terms of quantum, grow the GDP. But the measure we have put in place we don’t know how fast they can be,” added Ndung’u.

President William Ruto has upended his promise to go slow on borrowing following hikes in taxes through the Finance Act 2023. The administration has tapped fresh loans from the likes of the World Bank, the International Monetary Fund (IMF), African Development Bank (AfDB), among bilateral lenders from the Western countries.

The surge in liabilities has left the country at high risk of debt distress. Fitch is the latest global rating agency to downgrade Kenya’s credit rating to ‘B’ from ‘B+’ attributed to high default risks, occasioned by forex reserve challenges, rising financing costs, and the ripple effect of the high taxes on the economy.