Kenya must keep borrowing or crash, the IEA concedes

Kenya must keep borrowing or crash, the IEA concedes

The Institute of Economic Affairs (IEA) says it is impossible to stop the government from borrowing to sustain its operations. According to IEA Chief Executive Officer Kwame Owino, should the government stop borrowing, it will run into severe financial difficulties that could effectively ground its operations to a halt. Should the government slow down on borrowing, Kwame projects that there will be insufficient funds to even pay salaries to civil servants. “Kenya has been in debt distress for the last three years. Whether we choose to see it and acknowledge it is another thing,” said Kwame.

Kwame further says the government is faced with a budget deficit of over KSh. 1.2 trillion. This is in light of the fact that while the government is targeting to collect about Ksh. 1.8 trillion, the country’s national budget is in excess of Ksh.3 trillion.

According to the Central Bank of Kenya (CBK), the country’s total debt stood at KSh. 7.352 trillion in January 2021 – a figure that is Ksh. 1.3 trillion above the current national debt ceiling of Ksh. 6 trillion. The country’s debt level in January 2021 denoted a 20 percent year-on-year growth in the country’s level of public debt over that 12-month period. This means the National Treasury borrowed Ksh. 3.385 billion daily between January 2020 and January 2021.

External debt accounted for 52 percent of Kenya’s public debt at KSh.3.819 trillion, with domestic debt – which is debt taken out through Treasury bills and bonds, accounting for the remaining 48 percent at Ksh.3.532 trillion.

The IEA CEO says the government must now approach debt with caution to minimize risk of default. “Our current credit rating is a B+ which is one step away from default. We must retire commercial loans and lengthen repayment debt of the loans we take. We must be careful on who we borrow from. The interest rates must be lower than the GDP growth rate to allow ease of repayment”.

The IEA’s assessment of Kenya’s public debt situation comes in the wake of mounting pressure over the government’s borrowing appetite as well as growing dissatisfaction among Kenyans with the government’s spending and stance on corruption. Kenyans have previously taken to Twitter and Facebook to pressuring the International Monetary Fund (IMF) to stop lending money to the country.

On April, 2 2021, the Executive Board of the IMF approved a KSh. 255.9 billion loan facility to be disbursed over a 38-month period to support the next phase of the Government’s COVID-19 response and address the country’s urgent need to reduce debt vulnerabilities.

However, the IMF has maintained on several occasions that while Kenya’s default probability is high, the country is not in debt distress.

Early this year, the Parliamentary Budget Office (PBO) projected that Kenya’s public debt could top Ksh.7.8 trillion by June, accounting for 69 percent of Kenya’s Gross Domestic Product and 87% of the total debt ceiling. “Indeed, the debt stock is projected to double by June 2030 and could account for over 100 percent of GDP”, the advisory body warned.

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