Home » Kenya Economy May Miss Growth Target Amid High Debt Distress
Africa Economy Global News Kenya News

Kenya Economy May Miss Growth Target Amid High Debt Distress


Nairobi — Kenya is at risk of not meeting its economic growth targets in the medium term as the country grapples with high debt and a deteriorating macroeconomic operating environment.

Data from the Institute of Public Finance’s (IPF’s) Macro Fiscal Analytical Snapshot Report shows that the country finds itself in a tight spot following years of successive borrowing, coupled with the inability of the private sector to create sufficient jobs for millions of young people entering the job market annually.

Since 2014, the report notes, persistently high fiscal deficits have resulted in a swift escalation of public debt, now standing at 70 percent of the GDP.

The recent depreciation of the Kenyan shilling against the US dollar signifies a downgrade in the country’s economic outlook.

Furthermore, the elevated risk of debt distress as highlighted by the IMF poses challenges in effectively managing external debt servicing.

IPF CEO James Muraguri noted that for Kenya to maintain robust economic growth, it must put in place the necessary fiscal levers to promote faster private-sector-driven growth.

Other impediments include Kenya’s vulnerability to climate shocks such as drought and floods, which may derail growth over the long term.

“Revenue optimism has been a persistent problem in Kenya for several years which in the past has tended to result in higher-than-planned fiscal deficits financed by additional borrowing,” Muraguri said.

“More recently, rising global interest rates and a subsequent decline in inward foreign investments have caused the Kenyan shilling to depreciate steeply, significantly increasing the cost of external debt servicing and further putting pressure on Kenya’s foreign exchange reserves,” he added.

Kenya’s external debt service as a proportion of exports is significantly above the level that the IMF considers sustainable for a country such as Kenya.

Even if the IMF reclassified Kenya as a country with ‘high’ debt-carrying capacity, it would still be in breach of the upper limit until at least 2027.

While fiscal consolidation undertaken by the government over the past two years has relied on adjustments to expenditure, revenues are yet to fully recover to their pre-pandemic level.

Revenue mobilization fell sharply in 2019-20 as a direct consequence of the measures implemented to reduce the tax burden on businesses during the pandemic.

Despite a variety of reform measures having been undertaken since then, revenues have been slow to return to pre-pandemic levels and have lagged previous projections and targets.

On the expenditure side, fiscal consolidation in the past two years has led to a decline in real per capita spending, impacting development and fiscal transfers to counties.

Counties heavily rely on national fiscal grants, constituting 91 percent of expenditures, with limited own-source revenue (OSR) at 9 percent.

Source: All Africa

Translate