The Burden of Debt: Kenya’s Shrinking Borrowing Window

The government is facing significant pressure to repay its debts while its borrowing options are shrinking. The current estimate puts the public debt at Sh9.6 trillion, with both domestic and external liabilities increasing rapidly. However, the public debt ceiling is set at Sh10 trillion, allowing the government to borrow only Sh400 billion unless Parliament agrees to raise the ceiling as a percentage of the gross domestic product (GDP).

In April, the National Treasury warned that the country is heading towards a financial crisis unless Parliament approves its request to raise the debt ceiling beyond Sh10 trillion. The outstanding public debt as of March 2023 stood at Sh9.4 trillion, which is close to the limit. The domestic debt reached a record high of Sh4.55 trillion, while the external debt exceeded Sh4.85 trillion due to the depreciation of the local currency and new borrowings.

While the debt stock remains sustainable, there is a high risk of debt distress. Kenya’s public debt increased by nearly Sh700 billion in the six months leading up to March under President Ruto’s government, indicating a continuous appetite for borrowing. Concerns are growing that the country may face a full-blown debt crisis.

To address its financial crunch, the government recently raised over Sh213 billion through a seven-year infrastructure bond, although it came at a high cost with a coupon rate of 15.37 percent. The share of external debt is expected to rise further if the International Monetary Fund disburses the billions of shillings Kenya has sought.

The budget deficit for 2023-24 is Sh720 billion, implying financial trouble if the Sh10 trillion debt ceiling is breached. The National Treasury is requesting Parliament to replace the current debt ceiling with a limit of 55 percent of GDP. Although concerns have been raised about linking the debt ceiling to GDP, the Treasury maintains that government and policymaking should be solution-oriented and meet the needs of the economy.

Failure to raise the debt ceiling will prevent further borrowing, impacting the government’s national programs. Despite the challenges, the Treasury emphasizes that this is a continuous process of redefining the country’s economic approach.