Debt expenses surpass Kenya’s ordinary revenue flows

Kenya's debt repayment costs exceeded revenue from taxes and fees on services in the first month of the current year by Ksh4.9 billion ($33.8 million), pointing to a growing squeeze on public finances.

The Treasury spent nearly Ksh161.84 billion ($1.12 billion) on debt repayments in July, according to gazetted data on inflows and outflows from the government's main account, surpassing Ksh156.94 billion ($1.08 billion) receipts from taxes and non-tax revenue from State services.

The debt repayment costs were nearly double Ksh83.93 billion ($579.6 million) in the same month last year, reflecting a rising risk of distress for Kenya in the current fiscal year.

This came at a time taxes rose 18.73 percent to Ksh155.07 billion ($1.07 billion), while non-tax receipts, including user fees on government services, fell 4.03 percent to Ksh1.87 billion ($12.9 million).

Kenya is staring at record-high external repayment expenses in the current year, underlined by growing dues to China and bullet Ksh301.51 billion ($2.08 billion) [as per budget books] redemption of the debut Eurobond.

The July debt burden was partly on account of increased repayment to the Exim Bank of China, the financier of standard gauge railway and other projects, whose repayments are estimated at Ksh111.93 billion ($773 million) in the current year.

Overall, the Treasury has budgeted Ksh112.39 billion towards repaying China's debt, which increased from Ksh107.42 billion ($741.8 million) last fiscal year ended June 2023.

Kenya usually pays Chinese lenders in two batches in July and January every financial year.

The rising debt obligations have raised jitters among international investors over Kenya's ability to refinance huge external repayments.

"Despite the government's commitment to fiscal austerity, it may not be able to do enough to avoid a sovereign default over the next 12 months. External borrowing costs are prohibitively high," analysts at UK-based Capital Economics wrote in a note on Kenya's economic outlook on June 13.

Political pressures are likely to limit the extent to which the government tightens its belt. The key crunch point comes in June next year when large Eurobond payments are due."

The headache of serving external debt has been heightened by aggressive interest rate hikes by central banks in rich countries in the battle against inflation amidst the sustained weakening of the shilling.

The Treasury was, for instance, forced to increase the budget for foreign debt repayments by Ksh27.23 billion ($188 million) to Ksh389.45 billion ($2.7 billion) days to the end of last financial year.

That budget is projected to jump 71.86 percent this fiscal year to Ksh622.47 billion ($4.3 billion), according to estimates by the Treasury.

The rising burden of debt servicing costs on taxpayers is a reflection of increased borrowing during the previous administration of Uhuru Kenyatta, in which President William Ruto served as Deputy, to build economic growth-enabling infrastructure such as roads, power lines and a modern railway line.

Kenya’s debt binge is underlined by Eurobond offerings, a package of Chinese loans and syndicated commercial loans over the years which are now squeezing its finances as the loans fall due.

The International Monetary Fund and the World Bank have since 2020 classified Kenya at a high risk of debt distress since 2020 as a result of a persistently large deficit in annual budgets in more than a decade, which is bridged through borrowing.

Dr Ruto has vowed to honour public debt obligations over other recurrent expenses in a bid to instil confidence in international investors of his intent to avoid a sovereign default