By Janet Muchai
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.
