COVID-19: How Kenya can avoid a debt trap

Kenya's treasury recently acknowledged the country's high risk of external debt distress due to foreign currency obligations outpacing income from abroad. Eric Musau, Head of Research at the Standard Investment Bank, shed light on this concerning development during an interview with CNBC Africa. The issue of mounting debt in Kenya has been a topic of public concern for some time now, particularly following the recent increase in the debt ceiling. The economic landscape has been further complicated by the impact of the ongoing coronavirus pandemic, which has significantly hampered government revenue generation. Measures such as reducing VAT and corporate taxes have been implemented to alleviate the economic strain caused by the pandemic, with revenue collection experiencing a sharp decline of 10% in August alone. Despite these challenges, Kenya's debt-to-GDP ratio has historically hovered around 7 to 8%, which although still within manageable levels, has raised apprehensions about the country's financial stability. The escalating debt service costs, surpassing the 21% threshold highlighted by the International Monetary Fund, could potentially downgrade Kenya's credit rating to junk status, further exacerbating the debt crisis. Musau emphasized the necessity for Kenya to explore alternative funding sources for infrastructure projects, shifting away from sole reliance on government financing towards private sector investment and innovative financing models like toll roads. While certain sectors like floriculture and the emerging avocado and macadamia industries have displayed resilience, others such as aviation and tourism have been severely impacted and may face a prolonged recovery period. Despite the economic challenges, Kenya's export position remains relatively stable compared to other African economies, with diversified agricultural products contributing to a semblance of economic buoyancy. The nation's expected 2.5% GDP growth, albeit modest, positions it favorably in comparison to regional powerhouses like South Africa and Nigeria, both grappling with more substantial economic setbacks. The dip in oil demand has provided some relief by reducing import costs, offering a silver lining amidst the prevailing economic uncertainties.