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Kenya’s public debt reached Ksh 10.6T (70% of GDP) by June 2024. Despite high debt distress risk, fiscal reforms aim to cut deficits. Economic growth is forecast at 5.3% in 2025, driven by agriculture and services. Risks include inflation, investor flight, and limited fiscal space. Debt strategy focuses on domestic borrowing, risk reduction, and transparency.
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Kenya's public debt was Ksh 10.6 trillion as of June 2024, accounting for 70% of its GDP. The country's debt is a mix of domestic and external borrowing. The International Monetary Fund (IMF) has assessed Kenya's risk of debt distress as high. Despite this, the Kenyan government has initiated fiscal consolidation efforts, including expenditure cuts and increasing tax revenues. The government's revised budget estimates aim to reduce the budget deficit. Despite these challenges, Kenya is projected to maintain a growth rate of around 5.0%, supported by a recovering agricultural sector and resilience in services like information technology and financial services.
Kenya's debt levels have been a major cause for concern since, if left unchecked, they may result in growing external and internal responsibilities. This report examines Kenya's current debt management strategies, economic weaknesses and potential challenges to long-term economic stability.
A) Strategies for Managing Debt in Kenya
– The medium-term debt management strategy, or MTDS, directs borrowing choices to minimize the risk and expense of public debt.
– The government established a Public Debt Management Office (PDMO) to maintain sustainable public debt levels and an independent task team has been created for thorough forensic assessments.
– Diversification of Funding Sources: In order to obtain funding for infrastructure projects, Kenya has partnered with other countries; the United Arab Emirates is a prime example.
B) Potential Economic Risks
– Crowding Out Effect: High debt levels can hinder private investment, hindering economic growth.
– Fiscal Space Constraints: The government's ability to respond to economic downturns and make investments in social safety nets is hampered by the growing debt load.
– Currency Depreciation and Inflation: A weakening Kenyan shilling increases the cost of servicing foreign-denominated debt, affecting economic stability.
– Fiscal Deficit and Rising Interest Payments: A growing fiscal deficit necessitates more borrowing, reducing government spending on essential services.
– Decreased Investor Confidence: Long-term budget deficits and high debt levels discourage foreign investment, which may result in capital flight and hinder the chances for economic progress.
a) The draft 2025 budget policy statement's economic outlook:
b) The Draft Medium-Term Debt Management Strategy (MTDS) for 2025 states
The goals of the debt management strategy are to:
c) The borrowing strategy is to use 75% domestic sources and 25% external sources.
• The net borrowing allocation is 35% external and 65% domestic.
1) Prioritize fiscal consolidation to reduce recurrent expenditure and improve revenue collection.
2) Diversify funding sources like domestic capital markets, concessional loans and grants.
3) Increase the ability to manage debt by improving risk assessment, debt forecasting and transparency.
4) Encourage economic expansion to increase the sustainability of debt.
5) Manage currency risk through measures including hedging against exchange rate volatility.
6) Enhance debt transparency through regular public disclosures and parliamentary oversight.
Enhancing Public Debt Management in Kenya
Review of Kenya’s Public Debt 2024
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