Kenya’s Debt Exceeds 7 Trillion in August, Analysts Worried

Kenya's economic outlook is expected to remain ‘blurred by the uncertain path of the pandemic’ despite the roll-out of the vaccine to deal with the coronavirus pandemic, said NCBA Report released on Thursday.

Kenya’s debt has exceeded 7 trillion following large state borrowing as the coronavirus pandemic continued to wreak havoc to the economy.

Data from the Central Bank of Kenya’s Weekly Bulletin shows that at the end of August, total accumulated debt hit KSh7.068 trillion.

The debt increased by 0.158 billion compared with July’s KSh6.91 trillion.

Between March and August, the country borrowed KSh782.75 billion of which KSh329.07 billion was from domestic sources and KSh453.69 from external sources.

Analysts at Genghis Capital project that the public debt will hit KSh9 trillion by the year 2022 if the current rate of borrowing is sustained. 

“We opine that the KSh9 trillion public debt ceiling will be attained within the financial year 2022/23. That said, there is scope of hitting the ceiling in financial year 2021/22 if trends in recent fiscal years – where borrowing is revised upwards in mid-year budget revisions – is anything to go by,” Genghis said in its Asset Weekly Strategy – 12th October 2020.

“Total debt servicing cost in the current fiscal year is expected at Ksh 904.7 billion; representing 59.4% of the revised FY2020/21 ordinary revenue target (Ksh 1.523Tn). Over the medium term, total debt servicing cost as a percentage of ordinary revenue is expected to hit a high of 64.2% in FY2022/23.” 

For the correct fiscal year, the government is 51.3% ahead of its prorated borrowing target of Kshs 130.9 billion having borrowed Kshs 198.0 billion. 

However, Cytonn Investments is of the view, the government will not be able to meet their revenue collection targets of Kshs 1.9 trillion for FY’2020/2021 because of the current subdued economic performance in the country brought about by the spread of COVID-19.

“Therefore leading to a larger budget deficit than the projected 7.5% of GDP, ultimately creating uncertainty in the interest rate environment as additional borrowing from the domestic market may be required to plug the deficit.”

NCBA Analysts further note that the yield curve has to balance out the positive effects of an accommodative monetary policy outlook on one hand and increased government borrowing on the other.

“So far, the curve has maintained some stability as risk aversion favor sovereign risks. At the same time, heavy liquidity from both fiscal and monetary responses to the pandemic has accentuated demand for government debt. This is unlikely to substantially change into Q4 sustaining the relative calm on the curve, albeit with some mild upward bias. Looking further ahead, however, the planned withdrawal of tax relief earlier next year may set the stage for relative tightening,” they say in their NCBA Monthly Economic Report – September 2020.

“So far this fiscal year, the fiscal authority has absorbed Ksh 264.11 billion, around 50% of its net domestic debt target for the FY 2020/21, largely through Treasury bonds. Having frontloaded the bulk of this year’s debt, the government should have an easier time covering the gap, assuming the deficit doesn’t widen further.”