The cost of Kenya's rising debt

Kenya's public debt has soared by as much as 432 billion shillings in the first half of 2021, largely due to increased external borrowing in response to the COVID-19 pandemic. This escalating debt burden is raising concerns about its sustainability and the impact it will have on taxpayers. In a recent interview with CNBC Africa, Churchill Ogutu, the Head of Research at Genghis Capital, shed light on the current state of Kenya's public debt. Ogutu pointed out that Kenya's public debt had reached around $77 billion by the end of last month, approaching the $90 billion limit set by parliament two years ago. He warned that with an additional $9.3 billion expected to be added this financial year, the debt could become increasingly unsustainable. This mounting debt is already straining the government's ability to allocate funds to priority areas, as debt servicing absorbs a significant portion of the budget. However, Ogutu noted some positive developments, such as a reduction in the initial debt estimate for the year and a commitment to focus on the public debt-to-GDP ratio rather than a fixed debt ceiling. Despite these improvements, the burden of servicing the external debt, which accounts for 52% of total debt, remains a pressing issue. Ogutu highlighted the challenge of servicing domestic debt, which is more costly than external debt due to higher interest rates. This necessitates a continuous search for external financing and engagement with creditors, which could put further strain on revenue targets. The impact of the rising debt is already being felt by taxpayers, with increased costs such as a 16% VAT on Zoom calls. The knock-on effect of the debt burden on revenue targets is exacerbating the situation. The interview also addressed the effectiveness of borrowing for infrastructure projects in generating returns. While the national Treasury has set a threshold of 10% return on public investments, many of the current projects fall short of this target. Infrastructure projects like the Standard Gauge Railway (SGR) are long-term investments that require time to yield substantial benefits. Ogutu expressed doubts about the high return levels expected from these projects and emphasized the need for investments to benefit not only capital holders but also the general public. As Kenya grapples with its growing public debt, policymakers face the challenge of balancing infrastructure development with fiscal sustainability and ensuring that investments deliver tangible returns for the country's economy and citizens.