Kenya: Alarm as public debt service exceeds $ 9 billion

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The Parliamentary Budget Office (PBO) has sounded the alarm on the government debt service of 1.17 trillion shillings this year, noting that it will be a major constraint on the availability of resources to run government operations.

The amount is part of the 3.66 billion shillings budget for this fiscal year.

This means that the government will have to borrow more to make up the 940 billion shillings deficit in the current fiscal year budget.

In its budget watch report for 2021/22, the PBO notes that in June Kenya’s public debt had already reached 7.7 trillion shillings, with the government planning to borrow more to finance its operations.

In 2018, the government raised its debt ceiling to 9 trillion shillings.

The PBO document notes that the service of the public debt contributes 88% of the expenditure of the services of the Consolidated Fund (SFC).

It also represents over 66% of ordinary revenue, up from 44% in fiscal year 2019/20 and will make a substantial contribution to the budget deficit.

“In the medium term, public debt repayment spending could crowd out development spending,” says the PBO document.

The Public Treasury is committed to reducing the budget deficit as a percentage of the country’s GDP from 8.2% to 7.7% in 2021/22 to 4.5% in 2023/24.

But the PBO warns that without fiscal consolidation efforts, without targeted spending to boost economic growth and improve the efficiency of revenue collection, the budget deficit target may be unattainable.

The document further notes that the increase in debt service spending has exceeded the development allocations that the debt is supposed to finance by up to 189 percent.

“This indicates an over-indebted fiscal framework where borrowing is no longer productive. Reducing debt service would produce greater benefits for the fiscal framework than cutting any other expenditure item, ”says the PBO.

He adds that it will take serious consideration of the debt reorganization – a mixture of suspension, conversion and cancellation of debt.

The PBO document points out that revenue underperformance has been one of the main drivers of the expansion of the budget deficit.

The growth of the budget deficit including grants from about 6% in 2013/14 to almost 9% in 2020/21.

This means that without specific interventions to improve revenue collection, the budget deficit is expected to continue to worsen.

The country is also not doing well in terms of debt risks.

The budget office notes that in May 2020, Kenya was assessed as being at high risk of debt distress.

The impact of the Covid-19 shock and the associated response measures on the fiscal framework, the GDP growth rate and the associated uncertainty, exacerbated “this fiscal situation by deteriorating debt sustainability indicators”.

This led to the revision of Kenya’s debt carrying capacity from high to medium.

The benchmark public debt index (debt-to-GDP ratio) has also been reduced from 70% to 55%.

This indicates that the public debt-to-GDP ratio of 62.4% “is above the indicative sustainability threshold and is expected to remain so in the medium term”.

The paper notes that if the risk of domestic debt remains high, the increase in the risk of external debt will be of concern. In December 2020, external debt maintained a low risk profile relative to the stock of domestic debt.

But the refinancing risk is expected to increase in the medium term due to the debt service of Eurobonds in 2024 and 2028 of 265.68 billion shillings and the debt service suspension initiative aimed at reduce the debt service burden over the medium term.

The budget office says this could rack up long-term debt servicing expenses, between 25 billion and 35 billion shillings per year.

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