Kenya’s domestic borrowing now makes up half of the public debt stock after a slowdown in foreign loans on costlier external financing, reversing a trend that risks crowding out the private sector.
The Treasury data places domestic debt stock at the end of October 2022 at 50.2 percent, a five-year high, while external loans represent a paltry 49.8 percent of the total debt portfolio.
In contrast, domestic debt represented 49.2 percent of Kenya’s total debt stock a year earlier in October 2021, while external debt was 50.8 percent.
During the year to October 2022, domestic debt rose at a faster rate of 10.8 percent or Sh426 billion to hit Sh4.386 trillion, while external debt rose 6.8 percent or Sh277 billion in the same period to Sh4.360 trillion.
As of the end of October, the domestic debt stood at an equivalent of 31.2 percent of gross domestic product (GDP), while external debt was at 31.1 percent.
According to analysts at AIB-AXYS Africa, domestic debt has grown to the lion’s share of Kenya’s public debt, backed largely by sustained investor appetites.
On the flip side, disbursements from multi-lateral lenders such as the World Bank and the International Monetary Fund (IMF) have been Kenya’s saving grace in a tight external operating environment.
“Domestic debt continues to dominate with a percentage of the total financing driven by investors embracing short-term papers, the switch bonds and the tap sale of bonds are all initiatives to raise money,” said the analysts.
“External commercial debt has been difficult to access given the high yields on frontier market sovereign papers hence the government turning concessional borrowing from lenders such as IMF.”
Domestic debt as a share of the total debt portfolio has been on a steady increase in recent years, buoyed largely by increased domestic borrowing, and has risen from a lower 48.1 percent in October 2019.
Cognisant of the difficult external market conditions, the Treasury has adopted concessional funding as its primary stance on external financing.
However, the exchequer still plans to raise Sh111.2 billion ($900 million) from international banks (syndicated loan) before the end of June to help plug the financing gap left after the inclusion of both domestic and concessional borrowing.
“The planned Sh135.9 billion ($1.1 billion) external commercial financing for FY2021/22 did not take place amid unfavorable market conditions, reflecting the global risk-off attitude toward frontier issuers,” the Treasury said last month in a disclosure to the IMF.
The tight financing conditions from reduced external borrowing have left the Treasury staring at spending pressures after the postponement of part of expenditures in the concluded 2021/22 financial year.
“Due to the tight liquidity conditions in late FY2021/22, we have to honour Sh89 billion of expenditures that were authorised in the previous fiscal year but undisbursed,” the exchequer told the IMF.
