By Jerameel Kevins Owuor Odhiambo
Worth Noting:
- While Kenya’s debt is currently considered sustainable by the IMF, there are concerns about the country’s ability to maintain this status in the long run. The IMF’s Debt Sustainability Analysis (DSA) notes that Kenya’s debt carrying capacity is assessed as “Medium”[1], which means that the country is more vulnerable to shocks and external factors that could impact its ability to service its debt.
- Additionally, the DSA highlights the risk of exchange rate depreciation on external debt service, as much of Kenya’s external debt is denominated in US dollars.
- One of the key issues with Kenya’s debt-driven development model is the question of whether the borrowed funds are being used effectively and productively.
Kenya’s debt-driven development model has come under scrutiny in recent years, with concerns raised about the sustainability and advisability of the country’s borrowing practices. This article aims to provide an informed analysis of the issues surrounding Kenya’s debt-driven development approach and why it may not be the most prudent path forward.
Kenya’s public debt has been steadily increasing in recent years, reaching an estimated 61.7 percent of GDP at the end of 2020. This is a significant jump from 50.2 percent of GDP at the end of 2015. The ratio of domestic debt to external debt has also shifted, moving from 56:44 in May 2013 to 50:50 in May 2022. This trend indicates a growing reliance on borrowing to finance development projects and government spending.
While Kenya’s debt is currently considered sustainable by the IMF, there are concerns about the country’s ability to maintain this status in the long run. The IMF’s Debt Sustainability Analysis (DSA) notes that Kenya’s debt carrying capacity is assessed as “Medium”[1], which means that the country is more vulnerable to shocks and external factors that could impact its ability to service its debt. Additionally, the DSA highlights the risk of exchange rate depreciation on external debt service, as much of Kenya’s external debt is denominated in US dollars.
One of the key issues with Kenya’s debt-driven development model is the question of whether the borrowed funds are being used effectively and productively. The KIPPRA report suggests that the government should ensure that borrowed funds are directed towards more productive investments that stimulate economic growth and activity. However, if the borrowed funds are not being used efficiently or are being mismanaged, it could lead to a situation where the country is saddled with debt without reaping the benefits of the development projects.
Kenya’s debt dynamics are also vulnerable to external shocks, such as the COVID-19 pandemic. In 2020, Kenya recorded an annual growth in public debt of 20 percent, largely due to increased borrowing to address the economic impact of the pandemic. While the government participated in the Debt Service Suspension Initiative (DSSI) to relieve the debt service burden during this period, the end of the DSSI in December 2021 led to a significant jump in monthly external debt service as a percentage of tax revenue. This highlights the country’s vulnerability to shocks and the potential impact on its ability to service its debt.
Another consideration is the opportunity cost of relying heavily on debt to finance development. By allocating a significant portion of government revenue towards debt servicing, there are fewer resources available for other critical areas such as healthcare, education, and social welfare. This could lead to a situation where the country is making progress in terms of infrastructure development but falling behind in other important aspects of human development.
Concerns have also been raised about the transparency and accountability surrounding Kenya’s borrowing practices. There have been reports of corruption and mismanagement of funds, which could undermine the effectiveness of the debt-driven development model. It is crucial that the government ensures that there are robust systems in place to monitor and account for the use of borrowed funds, and that there are consequences for any misuse or misappropriation of resources.
While debt-driven development has been a popular approach in Kenya, it is important to consider alternative strategies for financing development. These could include increasing domestic resource mobilization through tax reforms and improving tax collection, attracting foreign direct investment, and promoting public-private partnerships. By diversifying its sources of development financing, Kenya could reduce its reliance on debt and potentially achieve more sustainable and equitable growth.
Improving governance and strengthening institutions is another key factor in ensuring the success of Kenya’s development efforts. This includes enhancing the capacity of the Public Investment Management Unit of the National Treasury and implementing Ministries, Departments and Agencies (MDAs) in conducting pre-feasibility and feasibility studies for all development projects. By strengthening these institutions and ensuring that there are robust systems in place for project planning and implementation, Kenya can improve the efficiency and effectiveness of its development spending, regardless of the financing model used.
Another important consideration is the prioritization of productive investments that have the potential to generate economic growth and increase government revenue. This could include investments in sectors such as agriculture, manufacturing, and tourism, which have the potential to create jobs, increase exports, and generate tax revenue. By focusing on these types of investments, Kenya can potentially reduce its reliance on debt financing over time and achieve more sustainable and equitable growth.
One potential strategy for improving the sustainability of Kenya’s debt is to restructure its debt portfolio. This could involve shifting towards more concessional borrowing from multilateral institutions and bilateral partners, which typically have lower interest rates and longer repayment periods. It could also involve extending the maturity profile of domestic debt, as the government has been doing in recent years. By restructuring its debt portfolio, Kenya can potentially reduce its debt service burden and improve its debt sustainability outlook.
In the context of Kenya’s fiscal sustainability, augmenting domestic resource mobilization stands as a pivotal strategy to mitigate the country’s dependency on external debt financing. The strategic imperative lies in advancing comprehensive tax reforms aimed at expanding the tax base and fortifying tax administration frameworks. This entails recalibrating fiscal policies to encompass broader segments of economic activity, thereby bolstering revenue inflows into the national coffers. Concurrently, there is an exigent need to confront the challenge of tax evasion and subdue illicit financial flows, which undermine the integrity of revenue streams.
Enhancing domestic resource mobilization denotes a multifaceted approach encompassing legislative adjustments, institutional capacity building, and technological integration within revenue collection systems. It necessitates the formulation of policy frameworks that incentivize compliance and disincentivize tax malfeasance through enhanced transparency and accountability mechanisms. By amplifying revenue generation capabilities through these measures, Kenya can potentially curtail its reliance on external borrowing, thereby fostering fiscal sustainability and safeguarding macroeconomic stability.
In summary, the utilization of debt as a catalyst for Kenya’s developmental trajectory has been pivotal, yet it brings to light pertinent concerns regarding its ongoing viability and strategic appropriateness. The escalating debt levels within Kenya underscore the susceptibility to economic shocks and raise fundamental queries about the efficacy of borrowed capital in generating sustainable growth. A nuanced approach that integrates a diversified array of financing mechanisms is imperative to chart a more resilient and sustainable development course.
Diversification across funding streams emerges as a pivotal strategy for Kenya to navigate the complexities of development finance. By broadening its financial base, Kenya can mitigate over-reliance on debt and cultivate a more stable economic foundation. This strategic diversification entails leveraging both domestic and international sources of capital, thereby fostering greater financial resilience against external economic disruptions and market volatilities.
The prioritization of investments that yield tangible economic benefits assumes critical importance in shaping Kenya’s developmental landscape. Emphasizing productive investments ensures that borrowed funds are channeled into sectors and projects that generate sustainable returns and bolster the nation’s economic capacity over the long term. This targeted approach not only enhances the efficiency of capital deployment but also fosters inclusive growth, thereby fortifying Kenya’s economic framework against future uncertainties.
The restructuring of Kenya’s debt portfolio emerges as another imperative facet of a sustainable development strategy. Optimizing the structure of debt obligations can enhance repayment capacity and reduce fiscal vulnerabilities, thereby safeguarding macroeconomic stability. This restructuring may involve renegotiating terms with creditors, diversifying debt instruments, and optimizing debt maturity profiles to align with the nation’s long-term fiscal objectives and economic growth trajectory.
Lastly, the augmentation of domestic resource mobilization constitutes a cornerstone in fortifying Kenya’s fiscal resilience and sustainability. By enhancing revenue generation through effective tax policies, improved collection mechanisms, and fostering a conducive business environment, Kenya can diminish dependency on external borrowing. This self-reliant fiscal stance not only bolsters financial sovereignty but also empowers the nation to allocate resources towards critical developmental priorities, thereby fostering equitable and sustainable socio-economic advancement.
In essence, the pursuit of sustainable and equitable growth in Kenya necessitates a multifaceted approach that integrates prudent financial management practices with robust governance frameworks. Upholding principles of transparency, accountability, and effective governance is paramount in ensuring that development resources are judiciously utilized to advance the well-being and prosperity of all Kenyans. Through strategic diversification of financing sources, prioritization of productive investments, debt portfolio optimization, and bolstered domestic resource mobilization, Kenya can chart a resilient path towards enduring economic prosperity and inclusive development.
The writer is a lawyer and legal researcher in Kenya
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