This archive report was first published on 14 October 2019.
On October 14, 2019, the Kenyan Parliament granted the National Treasury's request to raise the country's debt ceiling to Sh9 trillion, sparking a heated debate about the country's ability to manage its debt.
Just two years prior, the Parliament had raised the borrowing limit to Sh6 trillion, and many feared that the government was engaging in another borrowing binge.
The Treasury defended the new limit, stating that it was absolute and not tied to the country's productive capacity, unlike the previous limit.
However, critics argue that the government's debt is already unsustainable, with the country's debt-to-GDP ratio standing at 56% as of June 2019, exceeding the recommended 40% benchmark for developing countries.
With the government planning to borrow an additional Sh630 billion in 2019, the debt-to-GDP ratio would jump to around 61%, further exacerbating the problem.
So, why was the ceiling not raised to Sh6.6 trillion to accommodate the immediate borrowing gap, as some critics have suggested?
One possible explanation is that the headroom was intended to provide comfort to partners who have committed to mega projects such as the 'Big Four' initiative and the construction of the Mombasa-Nairobi highway.
The World Bank has warned that Kenya is at risk of debt distress, a view that the government has contested.
Despite the debate, it is clear that Kenya's debt situation needs to be addressed in the context of the country's economic realities.
For instance, the government's debt repayment costs have exceeded 30% of its income, a ratio that is unsustainable in the long term.
Furthermore, the country has taken on commercial loans at increasingly worse rates, a sign of rising anxiety among lenders over Kenya's creditworthiness.
Additionally, key foreign exchange earners such as agriculture are in decline, making it increasingly difficult for the country to service its mounting debt.
Given these factors, the Treasury must prioritize fiscal consolidation and live within its means to finance its budget.
Increasing domestic production, balancing public sector spending, and shifting to concessional debt are crucial steps that Kenya must take to avoid debt stress.
Therefore, Parliament should not raise the debt ceiling yet, but rather focus on addressing the underlying issues that are driving Kenya's debt crisis.
