About Sh33 out of every Sh100 spent by the government in the five successive budget cycles to 2023 was borrowed, official data shows, signalling the continued dependence on debt to finance the annual budget and its implication on the public debt load and sustainability.
The National Treasury has estimated total deficit financing between the 2018/19 financial year and the 2022/23 cycle at Sh4.691 trillion in a period in which actual total government expenditures were tabulated at Sh14 trillion.
This implies that the government has borrowed about one-third of its expenditure needs over the five-year review period with the financing being more than enough to cover the entire budget for a single fiscal year.
“The National Treasury and Economic Planning Ministry mobilized Sh4.691 trillion to finance the budget deficits for the strategic period through the issuance of two Eurobonds in the international capital markets and medium and long-term benchmark bonds from the domestic market,” the National Treasury states in its 2023-2027 Strategic Plan.
Deficit financing for the previous 2018-2022 cycle was defined by a mix of commercial and concessional loans with the government turning to cheap funding sources including the World Bank and the International Monetary Fund (IMF) after the onset of the pandemic which had the impact of locking out Kenya from the international capital markets.
Kenya has three outstanding Eurobonds from the period including a Sh116.5 billion ($900 million) issued in May 2019 at a seven percent interest rate, and which matures in 2027.
The paper was co-issued alongside a Sh155.4 billion ($1.2 billion) paper set to mature in 2032 and attracted an eight percent interest rate charge.
Other outstanding Eurobonds include a Sh129.5 billion ($1 billion) paper maturing in February 2028 and a sovereign bond of the same size, issued in June 2021 at a 6.3 percent coupon and maturing in January 2034.
The onset of the pandemic saw Kenya locked out of the international capital markets, forcing it to rely on World Bank financing to complement domestic borrowing for its development projects.
Kenya has meanwhile turned to the IMF to plug its balance of payments demand and has been part of a multi-year program with the multilateral since February 2021.
The IMF programme is set to lapse in April next year pending its probable extension on review by the lender and Kenyan Authorities.
The National Treasury's reliance on borrowing to fund the budget has left the country at a high risk of debt distress in the backdrop of high interest rates in the capital markets and an outsized public debt stock.
Kenya’s public debt stock hit Sh10.39 trillion at the end of March this year while the debt levels are in breach of the recommended debt anchor of 55 percent of GDP at present value terms.
Present value of debt as a percentage of GDP stood at 64.4 percent as of June 2023 but is expected to moderate to 53.7 percent by June of 2028 complying with the debt anchor requirement.
The National Treasury Cabinet Secretary was handed five years from November 2023 to comply with the debt anchor limit, requiring him or her to abide by the ceiling by November 2028.
Efforts to bring down debt levels via a revenue-raising anchored fiscal consolidation have taken an initial hit from the withdrawal of the Finance Bill, 2024 which had been expected to yield at least Sh303 billion in new revenues for the exchequer.
The budget hole for the 2024/25 financial year has since expanded from Sh597 billion to Sh766 billion or 4.6 percent of GDP raising the prospect of higher interest rates as the government maintains its high appetite for loans from both the domestic and external markets.
Over the next projection period, the National Treasury still sees the scope for enhancing government revenues through initiatives including the amendment of the Income Tax Act as it expects total revenues as a percentage of GDP to hit 19.7 percent from 18.6 percent in the 2023/24 cycle.
The National Treasury expects to mobilise a further Sh3.65 trillion between the 2023/24 financial year and the 2027/28 cycle even as it sees a reduction in the present value of debt to GDP ratio.
The revenue-raising measures are set to be complemented through increased private capital investment in public-private partnerships (PPPs) which are seen hitting Sh100 billion in the year to June 2028 from an estimate of Sh20 billion in the just concluded financial year.
County governments are also expected to enhance their own-source revenues to reach Sh100 billion a year over the same period.
The projected fiscal consolidation is expected to be undertaken in the backdrop of a sustained GDP growth rate and stable inflation and exchange rate.
