In January, Kenya secured a six-month moratorium on $245m of debt repayments to China. It also obtained six months of debt-service suspension from Paris Club creditors until the end of June.
“I don’t think it’s enough, as it just kicks the can down the road,” says Reginald Kadzutu, an economist at Amana Capital in Nairobi. “The amounts are not enough to make an impact and even if those funds are applied elsewhere, six months might not be long enough to make an impact.”
Kenya does not have long to address its high debt levels, as debt payments will soon consume an estimated half of government revenue.
Heavy bill to pay
The Kenyan treasury projects that debt service as a share of government revenue will reach 50% in 2023-2024, up from 31% in 2019-20.
To make its debt sustainable in the long term, Kenya needs to cut spending on infrastructure projects that have negative returns on investment, Kadzutu says.
Kenya should develop a growth strategy focusing on the country’s social and demographic structure, he argues. Most people are in rural areas, so “if you can’t create jobs there, rural unemployment becomes urban unemployment.”
- The government needs to invest more in research and development and create innovation hubs, argues Kadzutu.
- Kenya is a low-capital, labour-intensive market. So it should avoid engaging in projects that need a lot of capital, focus on creating employment now and deal with productivity later, adds Kadzutu.
Economic activity was slowing down even before the Covid-19 pandemic, says Renaldo D’Souza, head of research at Sterling Capital in Nairobi.
A return to near-normal economic activity could take up to three years, he says.
- That means it is likely that the government will ask for an extension to the debt-management period, says D’Souza.
- He says that debt restructuring is no more than a remote prospect.
- Kenya intends to access foreign capital through issuance of sovereign debt, which is “likely to limit its willingness to request for debt restructuring”.
“Kenya will do whatever it takes to maintain market access,” says Churchill Ogutu, head of research at Genghis Capital in Nairobi. The pressures over debt is a results of government spending that is “not entirely justifiable”, he says.
Ogutu sees hope in proposed legislation to raise the status of the Public Debt Management Office (PDMO) into an authority that will be able to pre-set the levels of debt to be accumulated in a given year.
If the law is passed, the agency would carry out due diligence on debt-funded government projects.
“That will be a big pivot from the current public finance framework where a debt pile arises due to revenue shortfalls and higher expenditure,” Ogutu says.
- The bill, introduced by member of parliament John Bunyasi, is due to be considered by the national assembly this month.
- Ogutu cautions that the real extent of the independence of such an office remains to be seen.
D’Souza says that the government has been fairly successful in the current fiscal year by increasing the average term to maturity of public debt through increased sales of longer-dated Treasury bonds as opposed to short-term bills.
In the longer term, Kenya needs to limit growth in public expenditure so that it increases at rates close to revenue growth, he says. “This ideally should involve a reduction in recurrent expenditure.”
- Development expenditure should also be directed at projects with the biggest impact on economic output, argues D’Souza.
- The country should also take steps to prevent wastage and corruption, he adds.
- Close to 70% of government income comes from taxation, D’Souza says. So there needs to be a focus on “ensuring tax compliance and collection, rather than increasing taxes from already strained households and businesses.”