Economy
Kenya hits 60 with deadly debts
Thursday 01 June 2023
A man stares fixedly at the Kenyan flag with fish and tomatoes tied to the tip of a pole. file image | NMG
Kenya celebrates its 60th birthday today (Thursday) with more than 60 percent of its economy mortgaged to foreign and domestic creditors.
While life expectancy has nearly doubled to 65 years, only a small percentage of the population shares the spoils of its economic power in the region.
On June 1, 1963, Kenyans took the first step towards independence, gaining internal autonomy from the British, their colonial masters since 1920.
Although with Madaraka Day the Kenyans only gained partial independence with complete freedom waiting another year and a half, they, nevertheless, took charge of their own finances and economy.
Mzee Jomo Kenyatta, who became the first prime minister of Kenya before Kenya became a republic, inherited a government that had a debt burden of Sh1.72 billion.
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But he also inherited a cheerful optimist.
Kenyans were full of hope that their lives would be better than they had been under four decades of British rule. Founding President Kenyatta had words of encouragement for them.
“We must work together to develop our country, get education for our children, get doctors, build roads, improve or provide all daily necessities,” said Jomo Kenyatta, better known as Mzee.
Since then, a more or less independent Kenya has managed to bake an even bigger cake for its citizens, Jomo promised.
Its gross domestic product, or the total value of goods and services, grew from Sh6.6 billion in 1963 to Sh13.4 trillion last year.
But on the other side, Kenya’s debt levels exploded, rising 5,657 times to reach Sh9.4 trillion as at the end of March this year, according to official data.
The debt-to-GDP ratio reached 64.7 percent in March, up from 25 percent when the country gained internal autonomy six decades ago.
The additional debt of Sh9.39 trillion during this period came with its own benefits.
In Independence, the installed electrical capacity was 102,214 kW, which is not even sufficient to power all cement companies today.
By the end of last year, installed capacity had risen 35-fold to 3,601.96 MW, with much of that investment funded using borrowed cash.
With electricity, Kenyans have also been able to greatly improve their living standards. Sixty years ago, only a few Kenyans were connected to the network.
Fewer homes are lit using electricity. Analog televisions and radios were franchise items.
Today, even the TVs in most living rooms are quickly turning into smartphones. Billions of borrowed funds have been used to lay fiber optic cables around major urban centers.
This has turned Nairobi into a so-called silicon savanna, with several innovations around fintech that have put Kenya on the global map.
In Independence, the only railway in the country was the old Lunatic Express built by the British in 1896 to have a direct connection to the fertile land around Lake Victoria.
Today, using loans from China, Kenya’s new bilateral partner, the country built a standard gauge railway (SGR), which transported goods faster to and from the port city of Mombasa.
There were about 1,125 miles (1,810 km) of paved roads across the country as the Kenyans began self-government. But today, thanks in part to borrowed money, Kenya has been able to dramatically increase its road network.
The paved roads were extended to 22,443 kilometers by the end of June last year, opening up remote areas such as northern Kenya that were, for a long time, separated from the rest of Kenya.
But Kenya’s debt – obtained from various creditors, ranging from multilateral institutions such as the World Bank to the Chinese government; America’s domestic commercial pension banks – also presented the country with its fair share of challenges.
Much of the tax revenue is used to service debt rather than go into such important public services as buying medicine or paying teachers who are still short of target.
In fiscal year 1962/63, for example, when Kenya gained internal self-government, for every 100 US shillings the government collected in taxes, only Sh10.5 was used to pay interest on the debt.
This amount rose to 34 shillings in the first nine months of the current financial year ending 30 June.
A pile of debt levels has seen the country slump from risk to debt rated to high from moderate, a debt stress test conducted jointly by the International Monetary Fund and World Bank.
This means that the country is at a high risk of default. These risks have been exacerbated by the prevailing global shocks which have reduced foreign exchange inflows into the country.
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Thanks to tighter liquidity in global financial markets, Kenya, which is due to repay a $2 billion sovereign bond due in June next year, is facing difficulties in raising funds from international capital markets.
A number of global rating agencies downgraded Kenya, citing increasing debt-related vulnerabilities exacerbated by dwindling foreign exchange reserves and a tight global financial market.
Reports that the salaries of a section of civil servants had been delayed with much of the tax revenue collected being used to settle outstanding debts raised fears of a painful cash crunch.
Some analysts worry that if nothing is done, Kenya could follow the example of Ghana, a pioneer of independence in sub-Saharan Africa, in a default.
This will be the first time, since independence, that the country has not met its debt obligations.
But the administration of President William Ruto, Kenya’s fifth president, is optimistic, noting that it has received more than 300 proposals offering different solutions to managing responsibility.
The country had announced its interest in the main managers of the banks holding Eurobonds to help them issue other international bonds, the proceeds of which will be used to pay the outstanding payments.
The Treasury also insists the country still has some room to borrow more, according to a joint IMF-World Bank Debt Sustainability Report for Kenya of December 2022.
“On this basis, the new administration is committed to managing public debt effectively and minimizing any risk of default at all times,” said Treasury Secretary Nguguna Ndongo.
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