How Kenya can Manage its Debt Crisis While Meeting its Obligations.

Kenya’s escalating public debt has emerged as a critical issue that threatens the nation’s economic stability and its prospects for sustainable development. Over the past decade, the country’s debt levels have surged. The main reasons for the surge have been ambitious infrastructure projects, persistent budget deficits, and unforeseen external shocks such as the COVID-19 pandemic.

As of 2024, Kenya’s public debt is estimated to approach 70% of its GDP. This has raised alarms about the government’s ability to manage its financial obligations without compromising essential services and development goals.

Thus, addressing this debt crisis is crucial for Kenya’s economic future, and it requires strategic and comprehensive measures to navigate these challenges while still meeting the country’s financial and developmental obligations.

Addressing Kenya’s Burgeoning Debt Crisis

One of the primary causes of Kenya’s debt problem is the persistent budget deficits fueled by uncontrolled government spending. To effectively manage its debt crisis, the government must implement stringent fiscal discipline. Cutting unnecessary expenditures and prioritizing essential services and development projects is a necessity.

This will require a thorough review of current spending, with a focus on reducing wasteful expenditures and tightening controls on public funds. Recurrent expenditures, such as public sector wages and allowances, constitute a significant portion of the budget. Addressing these costs could result in substantial savings.

Measures such as streamlining the public sector, keenly monitoring new hiring, and rationalizing allowances such as those for members of parliament and public servants can help reduce fiscal pressures and free up resources for debt servicing.

Enhancing revenue collection is another critical component of reducing Kenya’s reliance on debt. Although the Kenya Revenue Authority (KRA) has made strides in boosting revenue, there is still considerable room for improvement. Besides expanding the tax base, improving compliance is critically important. However, compliance should be done using a value-driven approach.

The government should adopt more efficient tax administration systems, including digitizing tax collection processes to minimize leakages and improve overall efficiency. Expanding the tax base can be achieved by moderately targeting traditionally under-taxed sectors, such as the informal economy, real estate, and digital businesses.

Simplifying tax procedures, incentivizing compliance, and reducing bureaucratic obstacles can encourage more businesses to pay taxes, while stricter enforcement and penalties for tax evasion will help increase revenues. Addressing corruption will encourage tax compliance as some factions avoid paying taxes by wit if it is going to be stolen while others bribe officers to evade paying taxes thus undermining collections which otherwise are responsible for development.

Better Management of Parastatals and Negotiating Better Lending Terms

Another key area of focus should be the reform of state-owned parastatals, many of which are a significant drain on public resources due to inefficiencies and chronic losses. The government should consider restructuring or privatizing poorly performing parastatals to reduce the fiscal burden of continuous bailouts and subsidies.

Privatization or public-private partnerships (PPPs) can inject much-needed capital and improve the operational efficiency of these enterprises. Additionally, enforcing strict performance contracts for parastatal managers and boards, coupled with regular audits, can help ensure that these entities are run more efficiently and contribute positively to the economy.

Kenya should also actively engage with its creditors to negotiate more favourable debt terms, including restructuring and rescheduling repayments. Debt restructuring may involve extending repayment periods, lowering interest rates, or securing partial debt relief in some cases.

Importantly though, transparent negotiations with bilateral and multilateral lenders can help Kenya secure terms that alleviate immediate repayment pressures. Furthermore, the government should prioritize concessional loans over commercial borrowing. Concessional loans typically have lower interest rates and longer repayment periods. This approach will help reduce debt servicing costs and free up resources for other essential expenditures.

Also, promoting economic growth and diversification is essential for managing debt sustainably. A growing economy generates more revenue which can be used to service debt without undermining other obligations. The government should implement policies that support key sectors such as agriculture, manufacturing, tourism, and information and communication technology (ICT). Economic diversification reduces vulnerability to external shocks that often aggravate debt challenges.

For example, investing in value addition within agriculture – as opposed to exporting raw products only – and manufacturing can boost exports, create jobs, and increase foreign exchange earnings. Similarly, fostering the digital economy and supporting innovation can create new revenue streams and drive economic growth.

Improving the management and transparency of public debt is crucial to avoiding future debt crises. Kenya needs a robust debt management strategy that includes clear guidelines on borrowing limits, debt sustainability assessments, and public accountability.

Debt Management and PPPs

Strengthening the institutional capacity of the Public Debt Management Office (PDMO) domiciled under the treasury and ensuring that all borrowing aligns with the country’s long-term development plans are vital steps.

Enhancing transparency in debt management can be achieved by regularly publishing detailed reports on debt levels, terms, and repayment schedules. This will help build trust with stakeholders, including citizens and investors, and ensure that borrowing is prudent and sustainable.

Public-Private Partnerships (PPPs) offer a viable alternative to traditional government borrowing for funding large infrastructure projects. The approach leverages private capital and expertise ensuring government can reduce its reliance on debt while benefiting from private sector efficiency. PPPs can be particularly effective in sectors such as energy, transport, and water, where private investors can provide financing in exchange for long-term returns.

Strengthening Kenya’s PPP framework will attract more private sector investment, ensure fair and transparent contracts, and manage risks effectively, easing the financial burden on the government. But these should be done transparently and corruption in the ranks must be rooted out to ensure Kenyans don’t end with a barren goose.

A stable and well-functioning financial sector can also support Kenya’s efforts to manage its debt more effectively. Strengthening the domestic financial market can reduce the need for external borrowing and provide the government with a more reliable source of funding. Developing a vibrant bond market that attracts both local and international investors will create more financing options.

Encouraging domestic savings through initiatives like pension reforms and financial inclusion can also provide a steady flow of capital for government borrowing, reducing the country’s dependence on volatile external markets.

Finally, implementing structural reforms to improve governance and reduce corruption is essential for managing Kenya’s debt crisis. Corruption and poor governance are significant obstacles that undermine the efficiency of public spending and contribute to debt accumulation.

Strengthening anti-corruption institutions, enforcing procurement laws, and ensuring that public funds are used as intended can greatly improve the efficiency of government spending. A commitment to transparency and accountability, coupled with a zero-tolerance approach toward corruption, will ensure that resources are used effectively, supporting both debt management and development goals.

And a bit more

Some of these measures are purportedly in place but poor implementation and lack of political goodwill have meant recurrent debt surge. Weakened institutions like the anti-corruption commission and legal justice system have seen corrupt people walk free and continue their looting spree without any repercussions.

Discipline, perhaps, in the governance ranks should be the first issue to address the profligatory attitude observed in government spending and mega-corruption dealings. Nevertheless, Kenya’s debt crisis presents a complex challenge as can be observed and requires a multifaceted approach to address.

Implementing fiscal discipline, enhancing revenue collection, reforming state enterprises, negotiating better debt terms, promoting economic growth, and strengthening debt management frameworks are some of the key urgent measures the country needs to take to effectively manage its debt burden while meeting its obligations.

Improving governance and reducing corruption will further ensure that public resources are used efficiently, paving the way for sustainable economic development. The government must act decisively and transparently to secure Kenya’s financial future and restore the eroded confidence in its economic management.