Kenya is building a potentially dangerous mountain of debt that could in the long run expose the economy to systemic risks, the World Bank has warned in a newly-released report.
The World Bank warns in the report that while Kenya’s public debt remains sustainable, the margin for further debt accumulation is narrowing at an uncomfortably rapid pace and exposing the country to potentially difficult times ahead if the borrowing spree is not tamed.
“Although public debt remains sustainable, margins for manoeuvre are rapidly narrowing,” the bank says in its latest economic update on Kenya that was released on Monday.
“With an over 13 percentage point of GDP increase in the debt-to-GDP ratio within a three-year period, and with debt levels over 50 per cent of GDP, and fiscal deficits well above the medium term 4.5 per cent target, the fiscal policy space is fast eroding and margins for further debt accumulation are narrowing,” the report says.
The warning runs contrary to the Treasury’s position that the national debt is manageable and that there is room for accumulate more debt without compromising economic growth.
The World Bank says its conclusion is informed by a recent Debt Sustainability Analysis (DSA) it jointly did with the International Monetary Fund, noting that the analysis highlights the precarious situation Kenya is potentially faced with.
The analysis found that despite the fact that risk of distress for the current debt level is still low, the rate at which it is rising is a cause of worry.
Kenya’s public debt increased from 42.1 per cent of GDP in 2012/13 to 55.1 per cent of GDP in 2015/16, on the back of a massive increase in development spending.
The World Bank says the situation is further compounded by the fact that growth in public expenditure has far outstripped growth in revenues, creating a major imbalance.
“Revenue is projected to grow by 2.3 percentage points in 2016/17 to 21.3 per cent of GDP compared to 19 per cent of GDP in 2015/16. Expenditure, on the other hand, is projected to increase by 3.7 percentage points of GDP during the same period,” the report says.
An ever expanding fiscal deficit, which is projected to be higher in 2016/17 should also be a cause for worry, the bank warns, adding that contrary to the expected decline in the fiscal balance as proposed in the 2016 Budget Policy Statement, the 2016/17 Budget suggests an increase in the fiscal balance to -9.4 per cent of GDP compared to -7.2 per cent of GDP in the previous fiscal year.
The warning comes as the Treasury is preparing for fresh foreign borrowing — partly to finance the Sh691.5 billion deficit in this year’s Sh2.2 trillion budget.
Kenya has committed to borrowing billions of shillings to finance mega public infrastructure projects, including the ongoing construction of the standard gauge railway (SGR) line.
The country has in the past four years borrowed billions of shillings to finance power generation and road construction projects and recent forecasts indicate that the borrowings could soon take the debt load past 60 per cent of GDP.
The government plans to borrow Sh675 billion this year, including Sh450 billion from foreign markets and Sh225 billion locally. Total public debt increased by 20.3 per cent to Sh2.84 trillion by June 2015 from Sh2.36 trillion in June 2014 to stand at 53.1 per cent of GDP.
The amount includes a Sh140 billion foreign loan that came on board in December 2015 to finance the second phase of SGR.
In 2014, the World Bank and the IMF sounded similar warning bells urging Kenya to put a tight lid on its debt load to keep the economy on a steady growth path.
Treasury secretary Henry Rotich last week indicated that investor interest in Kenya’s second Eurobond issue has been impressive, since the “non-deal” bond roadshow in April.
Kenya issued its debut Eurobond in 2014, borrowing a total of $2.75 billion in an initial issue and a subsequent tap sale.
“We know that investors are eager to continue investing in Kenya, but as you know, we have expanded the options of financing our budget to include domestic borrowing through the T-bills, bonds and other instruments like syndicated loans,” Mr Rotich said during the launch of the International Monetary Fund’s (IMF) Regional Economic Outlook.
The World Bank has meanwhile said in the report that it expects Kenya’s economy to grow at 5.9 per cent in 2016 up from 5.6 per cent in 2015.
Kenya’s overall economic performance has remained robust over the past eight years and is expected to continue into the medium term with a projected growth rate of six per cent or more in 2017 and 2018.
Key drivers for this growth include a vibrant services sector, enhanced construction, currency stability, low inflation, low fuel prices, a growing middle-class and rising incomes as well as a surge in remittances and increased public investment in energy and transportation.
“Kenya remains one of the bright spots in sub-Saharan Africa with its economic growth approaching six per cent and outpacing the 2016 regional average of 1.7 per cent,” said World Bank Country Director for Kenya Diarietou Gaye during the report’s launch.
The report, however, argues that the economy remains vulnerable to potential risks, which if unaddressed could derail growth momentum.
“To sustain Kenya’s growth momentum over the medium term, it will be important to manage risks that may arise such as a subdued global economy, volatility in global financial markets, and domestic shocks such as adverse weather conditions,” said World Bank senior economist Jane Kiringai and lead author of the Kenya Economic Update.
“Rebuilding fiscal buffers will provide the necessary policy space to mitigate such potential shocks.”