Kenya's debt hole due weakening shillings. How did Kenya get there and how does it get out

Kenya’s national debt has increased by KSh 382.6 billion over the past one year because of the rapidly weakening shilling which has depreciated by 23% against the dollar in that time frame.

• According to notes from Treasury, the country’s external debt service has increased by KSh 6.9 billion over the past four months on account of the exchange losses.
• External debt service has increased from KSh 95,978,114.06 million in June 2023 to KSh 102,832,258.75 in October 2023.
• The Kenya Shilling depreciated against the US dollar to trade at KSh 151.94 this Wednesday from KSh 151.84 in the previous session.  On a year-to-date basis, the Kenya Shilling has depreciated by 23.15% to the US$, compared to 9.04% depreciation for the year ended December 2022.

Kenya borrowed the most money in a single year during President William Ruto's first year in office, pushing debt levels past the limit amid tax collection shortfalls and increased repayment obligations.

According to new Treasury data, gross debt stock increased by Sh1.56 trillion for the fiscal year ended June, surpassing the Sh10 trillion mark by Sh189.53 billion.

Kenya ended the previous fiscal year in June with a gross total debt load of Sh10.19 trillion, an increase of 18.08 percent over Sh8.63 trillion the previous year, which was former President Uhuru Kenyatta's final full fiscal year.

In June, lawmakers voted to convert the numerical debt ceiling to a 55 percent of GDP anchor, with the Treasury given five years to comply.

The increase in gross debt occurred during a fiscal year in which Dr. Ruto, who was in charge for nine of the twelve months under review, made it clear that his administration would reduce borrowing.

In the last nine months of the fiscal year under review, nearly Sh1.43 trillion, or 91.52 percent, of the new gross debt was contracted.

Dr. Ruto, who campaigned on a promise to make debt a "last resort" for filling budget gaps, also promised not to make the nation "slaves of debt from any place or any country."

He promised to pursue policies that would increase tax compliance and increase national savings from the current "seven" percent of GDP to the 30 percent envisioned in Kenya's long-term development blueprint, Vision 2030.

"I am looking forward to the day, soon enough, when we borrow from the savings of the Kenyan people to run our development instead of borrowing from other countries, and that is what holds the future for us," Dr. Ruto said last September before being sworn in.

However, preliminary official data indicate that the Ruto administration's fiscal consolidation plan was hampered by underperformance in the main tax streams, which fell short of the Sh2 trillion target by Sh112.7 billion in a softening economy.

The stock of debt taken from foreign commercial banks and rich countries increased by Sh166.09 billion and Sh159.83 billion in the review period, partly reflecting the impact of a weaker shilling, to close at Sh1.36 trillion and Sh1.33 trillion. Borrowings sourced from domestic sources such as commercial banks, pension funds and insurers through the sale of Treasury bonds and bills increased Sh503.01 billion to end June 2023 at Sh4.83 trillion. The IMF and the World Bank have since 2020 classified Kenya at a high risk of debt distress since 2020 as a result of persistently large deficits in annual budgets in more than a decade, which are bridged through borrowing. Kenya’s debt binge is underlined by Eurobond offerings, a package of Chinese loans and syndicated commercial loans over the years which are now squeezing its finances as the loans fall due. The Ruto administration, for example, spent Sh1.16 trillion on servicing maturing debt and interest for the year ended June, with the burden projected to rise to an estimated Sh1.8 trillion in the current year ending June 2024.

Foreign borrowing accounted for two-thirds of the increase in gross debt, which rose to Sh5.36 trillion after Kenya contracted an additional Sh1.06 trillion from foreign creditors.

Multilateral lenders, primarily the World Bank Group, the International Monetary Fund (IMF), and the African Development Bank (AfDB), increased credit to Kenya by Sh728.85 billion, or 37.89 percent year on year, pushing it past the Sh2.65 trillion mark.

Loans from multilateral lenders such as the World Bank and AfDB are available on favorable terms, with an average fixed interest rate of 1.75 percent, a 35-year tenor, and a grace period of up to ten years.

This reduces the burden of future repayments, as opposed to commercial borrowing such as Eurobonds, where interest rates are higher, currently in the double digits, with shorter tenors.

How did Kenya get into the debt hole

According to Faida Investment Bank's debt distress report, Kenya's debt load increased from US$ 10.2 billion in 2013 to US$ 34.8 billion in 2020, with commercial borrowing increasing tenfold to US$ 10.4 billion and bilateral loans increasing nearly fourfold to US$ 10.6 billion, led by China. This sharp increase in external debt, particularly from non-concessional sources, has coincided with a sharp increase in debt servicing outlays.

From 2020 to 2022, Kenya relied on concessional multilateral borrowing from the IMF, World Bank, and African Development Bank (AfDB) to help deal with the impact of the Covid19 pandemic. Kenya also began a 38month IMF program in April 2021 that will last until mid-2024, with a USD 2.34 billion funding envelope aimed at strengthening fiscal and debt management.

As the overall debt stock increased, Kenya planned to sell a US$ 982 million Eurobond in January 2022 for the fiscal year 2021/2022 to help plug a 7.5 percent budget deficit. Due to rising yields on existing Eurobonds, which rendered the new issue financially unviable, this plan was scrapped in June 2022.

Eurobond issue cancellation

As a result of the canceled Eurobond, Kenya's foreign exchange reserves have steadily declined, from US$ 8.3 billion in January 2022 (5.1 months of import cover) to US$ 7.0 billion in November (4.0 months of import cover), with a temporary increase in December to US$ 7.4 billion (4.2 months of import cover).

The December improvement is due to the disbursement of a fifth IMF program tranche of approximately USD 447 million, which includes a supplementary amount of USD 216 million to help alleviate current financing constraints.

This was only a temporary increase, as foreign exchange reserves began to decline in 2023, owing in part to a US$ 400 million SGR loan repayment to China in January, to reach around US$ 6.4 billion at the end of February, reducing import cover to 3.9 months, a multi-year low.

Foreign exchange reserves stood at US$ 7.0 billion as of September 22, 2023, representing 3.8 months of import cover.

Kenya's national debt is expected to rise by 36.7 billion US dollars (51.34%) between 2023 and 2028. It is expected to reach at least US$ 108.13 billion by 2028, following the tenth consecutive year of growth.
 

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