Kenya is among African countries with the highest debt-to-GDP ratio and was categorised as at high risk of debt distress by the IMF in 2020. In just ten years, the debt-to-GDP ratio has increased by 30 per cent, from 38 per cent in 2012 to 68 per cent in 2021. This has been attributed to resource demands for offsetting perennial budget deficits, largely occasioned by expansionist policy on infrastructure development, the weight of a bloated government, corruption and waste in the civil service. Consequently, the government’s ability to efficiently deliver essential public goods and services to its citizens has been substantially constrained.
In recent times, many developing countries including Kenya have demonstrated an increased appetite for commercial debt, preferring to borrow from private companies, local and international bond markets, or banks rather than relying on concessional loans. Kenya’s shift to commercial borrowing can be attributed to various factors, including ineligibility to access concessional funding due to its change of status from a low-income country to a lower-middle-income country following the rebasing of its national accounts. Additionally, loans from private creditors often come with less scrutiny and conditionalities compared to loans from multilateral financial institutions and traditional Paris Club lenders.
As a result, Kenya’s commercial/private debt component has significantly increased, accounting for more than half of total national debt. Between 2012 and 2020, debt from private creditors averaged 58 per cent, with the highest share recorded in 2014 (60.5 per cent), 2018 (62 per cent), and 2019 (62.2 per cent), which aligns with the periods when Kenya had Eurobond issues. The majority of Kenya’s private sector debt consists of loans from domestic creditors, accounting for an average of 81 per cent between 2012 and 2020. Domestic sources include debt instruments such as treasury bills and treasury bonds, while external sources mainly comprise loans from commercial banks. Some of the major commercial banks that have issued credit to Kenya include China Development Bank, Citigroup Global Markets, Erste Group of Banks, First Mercantile Securities Corporation, Société Générale, Standard Bank Limited UK and Trade plus Development Bank.
In 2019, half of total tax revenues were spent on servicing debt from both local and external private creditors.
Existing scholarship indicates that debt from private creditors is associated with three major components that are detrimental to economies, especially in the developing world—high interest rates, shorter maturity periods and limited transparency in contractual agreements. Each of these components has its own repercussions, which are now manifesting in Kenya.
On transparency and accountability, debt from private creditors often lacks sufficient scrutiny due to limited public participation and availability of information regarding its acquisition and management. Private credit is also argued to have fewer conditions compared to concessional loans, leaving room for corruption and mismanagement of borrowed funds, especially where legislative oversight of debt management is weak. A notable example is the 2014 Eurobond issue, where KSh215.5 billion from the proceeds could not be accounted for, as revealed by an audit by the Auditor General. This involved alleged expenditure of the borrowed funds outside of the government’s Integrated Financial Management Information Systems.
On the cost of borrowing, private creditors generally offer loans at higher interest rates compared to the more favourable concessional loans offered by traditional multilateral and Paris Club creditors that are often below market interest rates. According to the National Treasury, the average interest for concessional external loans has never exceeded 4 per cent. In contrast, private sector debt, particularly in the form of Eurobonds, carries higher interest rates. For example, the 2018 Eurobond issue had an interest rate of 8.25 per cent, significantly higher than the rates for concessional loans. Interest rates for domestic-issued private debt have also been high. The average interest rates for treasury bills with maturities of 91, 182, and 364 days were 6.7 per cent, 7.3 per cent, and 8.4 per cent respectively in 2021. These rates are still higher compared to the interest rates for concessional loans. Generally, the higher interest rates have translated to greater debt servicing costs.
Further, loans from private creditors have shorter maturity periods of up to five years, while loans from multilaterals and Paris Club creditors have grace periods of five years and maturity periods of up to 30 years. The shorter maturity period coupled with higher interest rates implies that governments have a limited window to invest resources from such debt instruments into the economy and begin to accrue economic benefits, before commencing repayments.
Regarding fiscal justice, increasing repayment obligations for private sector debt (especially external creditors) has had negative implications for the economy and undermined the realisation of fundamental social and economic rights outlined in Article 43 of the constitution. For instance, the government’s development expenditure as a proportion of total revenues (and total budget) continues to reduce as the government diverts revenues to debt servicing. In 2019, half (KSh761.4 billion) of total tax revenues were spent on servicing debt from both local and external private creditors. This trend has continuously limited government expenditure on pro-poor sectors such as health, education, agriculture, and social protection, denying the majority of citizens access to quality and affordable public services. For instance, in 2020 the government allocated KSh548.41 billion to servicing private sector debt, which was twice the allocation for the health sector (KSh247 billion) during the same period. These debt servicing amounts could have been channelled towards improving COVID-19 response interventions, such as acquiring respiratory equipment, personal protective equipment and hiring additional health workers.
Additionally, due to overwhelming debt repayment obligations, the government has had to initiate tax reforms aimed at raising more revenue that also have fiscal justice and human rights implications. The proposed Finance Bill 2023 includes amendments to various laws relating to taxes and duties, which depict the dire state of the country’s finances. Some of the proposed amendments include introducing a 1.5 per cent housing levy deduction, increasing VAT on petroleum products from the current rate of 8 per cent to 16 per cent, implementing a 35 per cent tax band for those who earn above Sh500,000, increasing the Turnover Tax (TOT) from 1 per cent to 3 per cent, and introducing a 15 per cent withholding tax on proceeds from digital content creation, among others. If passed into law, these tax reforms will be regressive, imposing an increased burden on people’s livelihoods and businesses.
Lastly, increased domestic borrowing by the government (largely from the private sector) has also had a negative impact on micro, small, and medium-sized enterprises (MSMEs). According to the Central Bank of Kenya, there has been a declining trend in access to credit for MSMEs. The 2020 Access to Credit Business Survey revealed that the average loan size to MSMEs has reduced from KSh6.03 million in 2017 to KSh3.56 million in 2020 from commercial banks, and from KSh1.88 million in 2017 to KSh1.64 million in 2020 from microfinance institutions. During the same period, government debt holdings in commercial banks stood at 54.1 per cent. The increased holding of domestic debt by the government risks crowding out the private sector, leading to declining investment and financial market instability.
Despite participating in the 2020 Debt Service Suspension Initiative (DSSI), Kenya is currently trapped in a debt conundrum. Kenya’s maiden Eurobond issue is due for repayment in 2024, and the government plans to issue a new Eurobond whose proceeds will be used to repay the maturing 10-year bond. However, this approach only postpones the government’s chance to address the worsening debt situation and amplifies resulting implications, as seen when the government prioritised debt repayment over civil servants’ salaries in March 2023. The country’s deteriorating debt situation has also led credit rating agency Moody’s to recently downgrade the country’s foreign currency issuer ratings from B2 to B3, the lowest classification of “high credit risk” and just one level above “very high credit risk.”
Nevertheless, the country’s debt situation is not beyond redemption. There is a clear need for better debt management, with more effort directed towards pursuing opportunities for debt restructuring from private creditors. In 2020, International Financial Institutions such as the World Bank and the IMF called on private creditors to participate in the DSSI, but unfortunately, only one private creditor participated. Discussions on private debt restructuring need to begin by engaging private sector creditors, urging them to recognise their role in the country’s public debt problem. This could create space for negotiation, restructuring and debt relief programmes that could expand fiscal space for government spending on essential public goods and services.
The government plans to issue a new Eurobond whose proceeds will be used to repay the maturing 10-year bond.
Further, it is crucial for both state and non-state actors to advocate for the operationalisation of laws or policies that promote transparency and access to information regarding public debt, including loans obtained from the private sector. Transparent and accountable management of private debt is essential to prevent corruption and mismanagement of borrowed funds. The Kenyan legislature (both the National Assembly and the Senate) also bears the responsibility of effectively utilising its oversight role to hold the Executive accountable for fiscal policy decisions and debt management practices.
Additionally, ordinary citizens, who are increasingly bearing the brunt of the implications of the shift to private credit among other bad fiscal policy decisions, also have a significant role to play. Through advocacy and private litigation, citizens can push for publication of information—such as contracts between the government and private creditors—and demand accountability in the management of private sector debt. By actively engaging in these efforts, citizens can contribute to creating a more transparent and responsible debt management system that prioritises their interests.
In summary, addressing Kenya’s public debt challenges requires a multi-faceted approach involving better debt management, engagement with private creditors, transparency, accountability and citizen participation. These are now critical issues that Kenya must prioritise in alleviating the debt burden and risk of default, ensuring sustainable economic development and promoting fiscal justice for its citizens.
This article is based on insights from ACEPIS, East African Tax and Governance Network (EATGN) and Tax Justice Network Africa (TJNA) publication — Risky Borrowing and Economic Justice: The Role of Private Creditors in Kenya’s Public Debt Problem.