In recent years, the national government has been on a borrowing spree. This has worried many stakeholders who say that this is plunging the country into a burden of debt. The most recent borrowing was a total of KSh430 billion in just five months (February to June 2017). This borrowing pushed Kenya’s public debt to a whooping KSh4.41 trillion by the end of June 2017.
Definition of terms
Public debt refers to the money the government owes to lenders. It consists of internal or domestic (money borrowed within the country) and external (money borrowed from outside the country).
The lenders include individuals, businesses, financial institutions, and other governments. The government borrows money to compensate for the deficit in tax revenues.
The Gross Domestic Product (GDP) is the monetary value of all the final goods and services produced within a country in a specific time. GDP is an indicator that is recognized internationally. It is usually calculated on an annual basis and is commonly used:
- as an indicator of the economic health of a country; and
- to gauge a country’s standard of living.
The debt-to-GDP ratio is the ratio of a country’s public (or national) debt to its gross domestic product (GDP). It is usually expressed as a percentage. By comparing what a country owes to what it produces, the debt-to-GDP ratio indicates the country’s ability to pay back its debt.
One can interpret the ratio as the number of years the government needs to pay back debt if it dedicates GDP entirely to repaying debt. The debt to GDP ratio usually focuses on the sustainability of certain debt levels, and whether a country can repay its debt without refinancing (seeking out a new loan) or harming its economic growth..
Public debt to GDP ratio between June 2011-December 2016
In June 2011, Kenya’s total gross public debt stood at KSh1.487 trillion which was 53.4 per cent of GDP according to the Annual Public Debt Report 2011-2012 from the National Treasury.
By June 2012, the total debt, in gross terms, increased to KSh1.623 trillion representing 49.5 per cent of GDP.
The total debt stood at KSh1.894 trillion by June 2013 according to data from the Central Bank of Kenya. This represents 51.7 per cent of GDP according to the Annual Treasury Public Debt Report 2012-2013. The government expected this public debt to GDP ratio to drop to 44.0% in June 2016.
By June 2014, in gross terms, total debt was KSh2.423 trillion (47.9 per cent of GDP) and in June 2015, the debt stood at KSh KSh2.844 trillion (49.9 per cent of GDP).
Kenya rebased its GDP in 2014. Rebasing means replacing the old base year used for compiling the constant price estimates for a new and more recent base year. In this case, Kenya changed the base year from 2001 to 2009 which increased its value of goods and services (GDP) by nearly 25 per cent in 2013.
Gross public debt increased to KSh3.827 trillion by December 2016. This is equivalent to 51.5 per cent of GDP according to the Second Quarterly Budget and Economic Review Report 2016/17 from the Treasury. By January 2017, it stood at KSh3.887 trillion which is 52.3 per cent of GDP.
The debt to GDP ratio in nominal terms
Thus, in nominal terms, between June 2011 and June 2012, debt levels increased. However, as a percentage of GDP, debt levels reduced from 53 per cent to 49 per cent during the same period.
By June 2013, the public debt to GDP ratio went up to 51 per cent from the previous year and then declined to 47 per cent by June 2014. It later increased to 49 per cent by June 2015. The debt levels then rose to 51 per cent of GDP by the end of 2016 and 52.3 Percent by January 2017.
Therefore, the debt levels have been increasing even though the debt to GDP ratio keeps changing from year to year.
The implications of the increasing public debt
As already said, the national government has been on a borrowing spree that has worried many stakeholders. It is obvious that this is plunging the country into a burden of debt. Already, from this article, we see the public debt has more than doubled. It has increased from KSh1.487 trillion in June 2011 to KSh3.827 trillion by June 2017.
The debt continues to increase and has tripled by June 2017. The total public debt in June 2017 stands at KSh4.046 trillion which is nearly 54.4 per cent of the GDP. This is beyond the national government target of keeping the ratio of national debt against the gross domestic product (GDP) at 45 percent in the medium term.
Much of the recent external borrowing has gone towards financing infrastructural projects such as the Standard Gauge Railway (SGR).
One study on the effect of debt on economic growth in Kenya concludes that high level of public debt deters economic growth in Kenya. It advises the government to use borrowing as a last resort to finance its economic development since this is causing the “crowding out” effect problem in the country.
“A debt overhang problem might be experienced in the long run since the domestic debt is affecting the GDP negatively meaning that in future external debt will be used to service domestic debt if the level of borrowing is not contained.”
World Bank advises against Chinese loans
The World Bank in its report entitled Beyond Resilience: Increasing Productivity of Public Investments warns that even though Kenya’s public debt is sustainable, the margins for manoeuvre are narrowing rapidly.
The World Bank also cautions Kenya on external borrowing, especially from the Chinese government. It says that Kenya still has a heavy debt burden and China’s loans can bring debt to unsustainable levels.
Some of China’s loans are non-concessional (provided with a market-based interest rate), which can raise debt to GDP levels quickly. China is currently the biggest source of external debt for Kenya.