NAIROBI, Kenya Sept 15 – Central Bank of Kenya (CBK) Dr. Patrick Njoroge has noted the serious challenge that the country’s rising debt could poses to financial stability even as the government chases faster post-pandemic economic growth.
He told the Senate Budget and Finance Committee that the country needed to prepare proper policy responses related to debt management which stands at 56.5 per cent of the gross product from 42 per cent in 2013 when the Jubilee Government came to power.
“This is also problematic because, what we are saying for instance is that if you have it at 11 per cent what you are saying is that for Sh100 more than Sh10 goes to debt servicing and so there is only Sh90 that is left for the usual service,” the CBK Governor said.
According to documents presented before the committee, the total debt service to revenues increased due to a spike in debt stock and changing terms on new loans including one-off repayment of syndicated loans and Eurobonds in 2019.
He however said the trend is expected to reverse in the medium term due to improving terms on new loans, and the restructuring of external commercial loans that have heavy maturities and high interest cost.
The CBK Governor noted that his overarching concern is on the limited capture of the returns from the investments through increased exports and taxes.
“The total debt service as a proportion of revenue had shot-up to more than 50 percent in 2019/20, meaning that half of our revenues were going to debt service. Now it has come down to almost 40 per cent, but this is something that is quite worrying because for every Sh100 you only have Sh60 left to cover for regular functions of government,” Dr Njoroge told the Senators.
He further told the Senate team that the country must reconfigure its external debt which comes from massive borrowing in recent years to build a range of infrastructure projects such as the Standard Gauge Railway and highways whose projected impact is yet to be fully felt on the economy.
“There may be another bottleneck somewhere so that you can clog so that you don’t have to increase the tax brackets or tax base. The question is at the end do we have faster economic growth. That is to me the overarching question, why is it that we cannot capture more of these returns on investment,” the CBK Governor said.
The CBK boss noted that recent efforts to increase Kenya’s concessional public debt led to a 10.1 percentage points increase in the proportion of multilateral debt from 30.2 percent in June 2019 to 41.3 percent in June 2021.
In March 2021, the IMF assessed Kenya’s public and publicly guaranteed debt as sustainable but with high risk of debt distress.
Dr. Njoroge explained that main factors driving this assessment were high deficits from the past and the COVID-19 shock and sharp decline in exports and economic growth caused by the pandemic.
“Kenya’s debt was subjected to lower thresholds and benchmarks during this assessment due to a downgrade in the debt carrying capacity from strong to medium debt carrying capacity majorly due to subdued world growth driven by the COVID-19 pandemic,” he said in his presentation to the Senate.
The assessment also took into consideration the financial weaknesses in State Owned Enterprises, subdued export growth, economic impact of COVID-19 pandemic and Kenya’s debt sustainability is expected to improve as fiscal consolidation progresses and exports and output recover from the global shock which were highlighted as the main risks to the country’s Debt Service Assessment outlook.
