A popular narrative on the newswires and in the financial media is that the Kenyan government is creating a debt trap from which it will not be able to extricate itself. This follows a move by its national treasury to increase the statutory ceiling for central government debt from 50 percent of GDP to KES9 trillion ($87 billion). So, it has removed the ratio as the cap (on which more later) and set a ceiling close to 100 percent of GDP, which was KES8.9 trillion in 2017/18 (July-June).
This leaves a huge amount of headroom since central government debt at end-March 2019 stood at KES5.4 trillion, divided roughly half and half between domestic and external obligations. The burden has risen rapidly, from KES2.2 trillion in March 2014 and KES3.3 trillion in March 2016. Some additional analysis is required to test the consensus view that a number of emerging markets, Mozambique and Zambia for example, have entered the territory marked unsustainable debt trap and that more are set to follow.
The journey continues to rescheduling, haircuts and, the indulgence of official creditors permitting, a second round of debt relief. Kenya is on this slippery slope, the argument runs.
We welcome the ditching of the ratio from the treasury’s ceiling because it tells us little. Debt is serviced by taxpayers, so we do not learn much from a ratio that covers the large informal economy and other segments of society that for whatever reason do not pay tax.
The Kenyan public finances for August 2018, for example, show total interest payments of KES53 billion, equivalent to 27 percent of tax revenue or 23 percent of total revenue. Debt payments are not at a dangerous level and the government has the resources to make sizeable capital outlays, although the latter are running a little low at about 22 percent of total expenditure. These judgments would have to be suspended/rewritten if government borrowing was to move rapidly to the new ceiling.
The government does show some signs of being in a hurry because it has requested parliament to approve loan documents which would add KES420 billion to its external debt. Why the hurry? It has already embarked on a major overhaul of the national infrastructure and wants to accelerate the process, calculating that it has to meet the larger part of the funding from its own borrowing because its own revenue generation is inadequate for the purpose. Only such an overhaul, covering the hard and soft infrastructure, can lift millions of Kenyans out of poverty and raise the country to middle-income status.
An ambitious programme on this scale has potential pitfalls, so we need to recognise the possibility that: sizeable loan proceeds are deployed on salaries and recurrent budget items; that project implementation is of a poor standard, and that the overhaul does not generate the revenue for the government to service the mounting debt burden. Additionally, external partner fatigue might force the government to depend heavily on domestic debt markets and thereby “crowd out” the real economy. China has funded the new railway line from Mombasa to Nairobi, and on to Naivasha in the Rift Valley, but declined to finance a further extension to the Ugandan border.
There are some clear pointers for Nigeria in this story. The FGN has similar ambitions to transform the national infrastructure and economy, and jettison the tag of being the ‘extreme poverty capital of the world’. Its debt stock ratio is far superior to Kenya’s, at just 20.1 percent of GDP for the three tiers of government in June 2019. However, Nigeria lags Kenya by a large distance on the more important measure of the debt servicing burden: total debt payments consumed 60.0 percent of the FGN’s retained revenue in 2018 or 54.1 percent on the broader definition (of retained revenue with the assorted accounting extras). Further, domestic interest rates are higher than in Kenya, by about 500 basis points along the Treasury-bill curve.
The core ratio for servicing costs is far worse in Nigeria, indeed twice as bad, and it is far behind Kenya in the overhaul of its infrastructure. Its National Assembly appears more robust in the defence of its rights than its Kenyan counterpart and less inclined to follow the script of the elected government. The same pitfalls listed for Kenya apply to Nigeria with the probable exception of fatigue on the part of China and other external partners.
The consensus view has it that the Kenyan approach is fiscally irresponsible, and a step in the direction of an unsustainable debt mountain. This is overdramatic in our view as well as somewhat patronising. They will fall short of their destination in our view because of fatigue on the part of their external concessional partners and because the public agencies do not have the capacity to absorb a stepping up of the infrastructure programme on the scale implied by the hike in the national debt ceiling.
The FGN has a less aggressive programme (and government), and is not expected to ramp up its borrowing on the Kenyan scale. We admit to some sympathy with the Kenyan strategy because the successful migration out of poverty and towards middle-income status requires, among other things, a modern, overhauled infrastructure.
Head, Macroeconomic & Fixed Income Research