About Sh 1 trillion is owed to foreign commercial banks. FILE PHOTO | NMG
According to an IMF report released on Tuesday, October 23, 2018, Kenya’s risk on defaulting on debt moved from low to moderate. IMF noted that the higher level of debt, together with rising reliance on non-concessional borrowing, has raised fiscal vulnerabilities and increased interest payments on public debt to nearly one-fifth of revenue.
It warns that Kenya’s external debt distress has left the country in a critical situation, where any slight external disturbance such a drought or increase in the global oil prices could plunge it into a financial crisis. Kenya is now facing an unprecedented debt crisis never known in the history of the country.
The debt problem has, for decades, remained a recurrent and discordant note in the discourse on the crisis and contradictions of Kenya’s development. This is, however, not entirely surprising given its magnitude and the consequences for Kenya.
The collective debt burden of the country represents a massive betrayal of Kenya’s huge resource base, both human and material, and the failure of policy measures targeted at the management of those resources The debt problem of Kenya has reached a frightening dimension that it threatens to cripple socio-economic and political development in Kenya, if not urgently addressed. In Kenya the debt continues to gather strength and to make matter worst, we might soon find ourselves not able to service the interests payable on these debts when they fall due and it has been difficult to reschedule these debts to give Kenya some “breathing space” to enable her to put her acts together.
Given the situation Kenya finds itself in, there have been arguments advanced that Kenya should just default on her debt. However, given the structure of our debt, defaulting is not an option. Approximately 50 per cent of our debt (Sh2.5 trillion) is a domestic debt owed, majorly, to Kenyan Financial Institutions. Default on this would possibly cause the entire financial system to collapse with dire ramifications to the economy.
About Sh 1 trillion is owed to foreign commercial banks. Any default on this would have an adverse impact on the economy as the Kenyan shilling would plummet making our external debt blow out of control. The government would lose its access to the debt markets and would no longer finance deficits by issuing bonds in foreign countries.
This would force it to either have zero public deficit or print money to pay for the deficit triggering massive currency depreciation. Given that we owe Sh2.5 trillion ($25 billion) in foreign debt, a depreciation of the shilling by, say, 20 per cent to the dollar would see the debt grow by half a trillion shillings without even borrowing an extra shilling. Debt is a phenomenon, which can never be worn out, but the problem with Kenya is that the money which is borrowed is lavished without any trace, due to the decadence of the economy, instead of being inputted into the growth of the country. Going forward, Kenya should define the level of debt which is sustainable given the country’s resources and circumstance and formulate policies on public debt and implement these policies to ensure that the debt levels are within manageable limits.
In addition, the government should consider alternative funding for mega projects. This may include public-private partnerships or though diaspora infrastructure bonds. These alternative methods of funding will therefore gradually lower the public debt-to-GDP ratio while raising the infrastructure investment.
Dominic Nzuki, strategy consultant, Altima Africa Limited.
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