Kenya’s economic history and increasing public debt

In Kenya, we face many alarmists who predict gloom and doom for our government and thereafter our society. In this age of unqualified pundits ( from CNN to Fox News to right here in Kenya) who get air time because they excel at speaking on television instead of good at analysing facts with research, many commentators proclaim catastrophic results will befall our land at every turn.

One of the largest economic fears is that we cannot afford the rising Government of Kenya debt burden. The latest figures from the Central Bank of Kenya show our government’s public debt of Sh5.2 trillion, the equivalent of $51.6 billion, fairly evenly split between domestic and external debt. Our GDP stands at Sh7.6 trillion, or $74.9 billion, thus representing a 68.9 per cent debt to GDP ratio. So, the government’s debt comprises 68.9 per cent of our total annual economy.

The International Monetary Fund (IMF) recommends that debt to GDP for a developing nation should hover around 40 percent or for middle income nations at 50 percent. But does the IMF exhibit bias favouring North American, European, and East Asian economies? Belgium, Singapore, Barbados, Japan, Italy, and Portugal, among others, all hold public debt to GDP at over 100 percent. Almost the entire European Union nations retain more debt to GDP than we do.

Since our strong annual GDP growth in Kenya fluctuates around five per cent, we are arguably more capable of handling future debt repayments than the other before mentioned countries. In order to give some perspective, interesting new research published by Rebecca Simson at the London School of Economics sheds light on Kenya’s past experience with public debt. The country has a long history of public debt dating back even to colonial times. In the two decades following our independence, we spent large portions of our annual budget on development activities hitting peaks of 25 percent of annual public expenditures. But ever since the 1982 coup attempt in Kenya, development comprises a much lower proportion of our budgets between only 10 and 20 percent of our public spending. Now we spend roughly the same proportion of the government’s budget on development activities as was spent during colonial times. What has filled the gap that lowered our development spending? Annual interest payments on our national debt.

In the 1980s and 1990s, Kenya spent dramatically more on public debt servicing on interest payments than we do now. During the height of our public debt craze, over 30 percent of our national budget was spent on interest payments. In 2017 to 2018, we only spent between eight to 10 percent of our national government budget on interest payments. We have a much easier time these days paying government debt than we did in the past.

Even if we remove the Sh558.9 billion deficit in our latest budget and only look at available funds, our public debt interest payments as a proportion of our annual government budget would fall between 10 to 12 percent.

Does this mean that Kenya should keep taking more government debt? Certainly not. While the absolute value of our debt should not be terribly alarming, three factors should concern us.

First, the dramatic increase in our debt over the past four years. Most other countries do not increase public debt levels so quickly. Second, the purpose of our debt is important. Public debt utilised for development purposes is generally more acceptable than filling operational gaps. Development financing increases our capacity to grow our economy and therefore pay back the debt more easily.

But personnel labour expenses and goods, services and transfers currently make up the lion’s share of our government’s expenditures. Government debt should never be utilised for such expenses except in national emergencies.

Third, were the development activities financed by public debt worth the investment helping an equal distribution of Kenyans?

Stay tuned for next week in Business Talk when we examine the labour costs within the government’s budget over time and if regional biases exist.

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Dr Scott may be reached on [email protected] or on Twitter: @ScottProfessor