Treasury expects debt to cross Sh13trn by 2027

The Treasury says overall public debt still carries higher risks of distress with the government’s total borrowing expected to hit more than Sh13 trillion in the next three years (June 2027).

This is tied to rising spending requirements and falling revenue collections.

The exchequer, in its latest annual public debt management report for the 2022/2023 fiscal year, says Kenya is already in breach of crucial debt sustainability indicators relating to solvency and liquidity ratios.

“Kenya’s overall and external public debt remains sustainable in the medium-term, but with elevated risk of debt distress,” says the Treasury.

The public debt increased by Sh1.64 trillion to Sh10.27 trillion by the end of June last year (2023) from Sh8.63 trillion in June 2022 and the Treasury expects the country’s overall debt to peak at Sh13.19 trillion by June 30, 2027.

By December last year, the public debt increased to Sh11.14 trillion from Sh9.2 trillion in 2022.

The Treasury said that so far the economy’s present value (PV) of external debt-to-exports, external debt service-to-exports ratios, and the PV of the overall public debt-to-GDP ratio had shown breaches of the set thresholds. The PV concept states that an amount of money today is worth more than that same amount in the future.

“The Present Value (PV) of external debt-to-exports (solvency), external debt service-to-exports (liquidity) ratios, and the PV of the overall public debt-to-GDP ratio show breaches of thresholds under the baseline scenario,” the Treasury said.

Last month the Treasury raised $1.5 billion(Sh216.72billion) through a Eurobond issued expensively to global investors to help buy back its $2 billion(Sh288.79billion) Eurobond that was issued in 2014 and is maturing in June.

As a result, President William Ruto said the new bond issue together with the painful taxation measures that his administration has taken have helped to pull the economy out of debt distress.

The Treasury, however, says Kenya’s debt remains within sustainable limits with a high risk of debt distress for both overall and external debt rating.

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“The external debt burden indicators in terms of exports and revenues exceed their respective thresholds under the baseline,” says the Treasury.

In the last fiscal year (2022/2023) the Kenya Revenue Authority missed its revenue target by Sh107 billion and in the first five months (July-November) of the current fiscal year (2023/2024) the taxman collected Sh963.7 billion, about 34.6 percent of the expected Sh2.78 trillion target for the 2023/2024 fiscal year.

Compared to a similar period in the last fiscal year (2022/2023), the Authority collected Sh856.6 billion (40 percent) of the Sh2.14 trillion annual budget.

According to the Treasury, the country has breached the PV of public and publicly guaranteed external debt-to-exports ratio which stood at 220.4 in June 2023 against a threshold of 180, and the PPG debt service-to-exports ratio which stood at 22 against a threshold of 15.

PPG is basically an external obligation or debt of the private sector, the servicing of which is contractually guaranteed by a public unit or entity.

“The PV of PPG external debt-to-exports (solvency indicator) remains above the threshold (180 percent) while through 2026, while the debt service-to-exports (liquidity indicator) exceeds its threshold (15 percent),” says Treasury.

Treasury, however, says the Government has committed to a fiscal consolidation program and optimising on the financing mix in favour of concessional borrowing to finance capital investments to reduce debt vulnerabilities.

“Additionally, a steady and strong inflow of remittances and a favourable outlook for exports will play a major role in supporting external debt sustainability,” it says.

According to the Parliamentary Budget Office (PBO), the economy is still in danger of a liquidity crisis with its key debt sustainability indicators, including debt service-to-revenue ratio and debt-to-gross domestic product (GDP) ratio headed south.

“Moreover, a significant risk of debt distress persists, primarily arising from liquidity risks, while debt dynamics remain susceptible to fluctuations in exports, exchange rates, fiscal conditions, and natural disasters,” says PBO.

During the 2022/2023 fiscal year, the Government contracted eighteen (18) new external loans equivalent to Sh 345.89 billion out of which, eight were from multilateral lenders, six from bilateral lenders, and four from commercial banks.

Kenya’s debt service in June 2024 is projected to increase to Sh 2.04 trillion from Sh 1.19 trillion in June 2023.

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This is largely due to increased external debt repayment that resulted from the depreciation of Kenya Shillings against the dominant foreign currencies within the external debt portfolio and high-interest payments on domestic debt due to the high domestic interest rate environment.

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