Yatani: Kenyas public debt remains sustainable but capacity to carry debt has reduced

Kenya’s public debt remains sustainable, despite a decline in debt-carrying capacity, according to Treasury Cabinet Secretary Ukur Yatani, who spoke in Parliament on Thursday while unveiling the 2021/2022 budget.

The Debt and Borrowing Policy, as well as the yearly Medium-Term Debt Strategy, will continue to guide fiscal deficit financing, according to CS Yatani.

At the same time, CS Yatani stated the government’s intentions to adopt reforms to strengthen the institutional arrangement of public debt management by aligning the Public Debt Management Office’s activities with the Public Finance Management Act.

“In this respect, decisions on the day-to-day management and operations of public debt management shall be undertaken by the Public Debt Management Office to enhance efficiency, strengthen accountability and transparency.” CS Yatani said on Thursday.

According to CS Yatani, the ministry has also planned a series of debt management operations to reduce cost and risk in the country’s public debt portfolio in order to strengthen the country’s debt sustainability indicators and sovereign credit rating.

He urged the August House to support the amendment of the public debt ceiling stipulated in the Public Finance Management Act to allow debt management activities, including financing of the fiscal deficit, to be implemented.

The International Monetary Fund (IMF) downgraded Kenya’s debt-carrying capacity from strong to medium in early April, citing worsening growth and export indices.

Lower reserve coverage was also mentioned by the multilateral lender in its assessment of the country’s debt carrying capacity in its report.

Kenya’s 10-year average growth rate was revised downward from 5.7 percent to 5.1 percent, resulting in a 14 percent drop in the carrying capacity composite indicator score.

Kenya’s debt, according to the IMF’s debt sustainability analysis (DSA), is sustainable, with the present value (PV) of public and publicly guaranteed debt (PPG) as a percentage of GDP expected to remain below 40% for the next 20 years.

According to the paper, “it also remains below the barrier with the most extreme shock-a one-time depreciation.”

Despite this, debt indicators in terms of exports are breaching permitted levels, owing to a decrease in exports and increased foreign debt.

Kenya, for example, is in violation of two solvency ratios: the present value of guaranteed debt to export ratio and the debt service to exports ratio.

Last year, the IMF moved Kenya’s rating of debt distress from medium to high attributing the reclassification to shocks emanating from the COVID-19 pandemic.

Kenya’s debt stock stood at Ksh.7.3 trillion by the end of 2020, representing an estimated 69 percent of GDP, a result of rising budget deficits throughout the years to finance infrastructure projects.

External creditors account for about half of Kenya’s debt, with multilateral creditors holding 40% of the stock.

Meanwhile, bilateral creditors control 33% of the external debt, with 63 percent going to non-Paris club members like China.

Commercial lenders own the rest of the foreign debt, with Eurobonds accounting for 70% of the total, or Ksh.659 billion.

In the meantime, the stock of domestic debt towards the end of 2020 represented around 30% of GDP, with Treasury bonds accounting for 70% of the stock (T-bonds).

Commercial banks hold about half of the local debt.