Kenya’s High Risk Of Debt Distress is largely a consequence of the devasting COVID-19 pandemic and the subsequent invasion of Ukraine by Russia. This, coupled with other macroeconomic consequences of the global order has played a big part in undermining the current administration’s ability to service its debt.
The country also had an unnecessarily prolonged electioneering period that sapped a significant amount of resources out of the treasury. As the country struggles to raise revenue to meet its expenditure requirements, it is a no-brainer that closer coordination with the Western world and international lenders is required to help calm the situation.
The World Bank and IMF remain Kenya’s key development partners. The two have lent a significant amount of resources to the country and helped support a wide range of ongoing and new projects – including infrastructure development.
China alone accounts for about 32% of the total debt owned by the country. However, China is not at all responsible for Kenya’s High Risk Of Debt Distress and local cash crunch crisis within the local economy. It is however true that the total external debt owed – the majority of which is in China – has limited the country’s ability to deliver broad-based social improvements for its vastly youthful population.
In this sense though, the Western world, global lenders including the IMF and the World Bank, and China hold the solution to Kenya’s High Risk Of Debt Distress and redress status. The country and its leadership are incapable of tackling the situation, let alone handling it.
In his Jamhuri Day address to the nation, President William Ruto speculated that the ‘hard choices’ he is taking will be key to tackling Kenya’s High Risk Of Debt Distress situation. The said hard choices relate to the tough taxation measures implemented by his government to widen revenue streams for the government.
“The greatness and patriotic devotion of the people of Kenya have been on display during the past year. Together, we have made the right choices, sometimes taking very difficult and painful decisions, to steer Kenya back from the edge of the catastrophic cliff of debt distress, and move our nation in a new direction. There is every reason to believe that without serious sacrifices and hard work over the past year, the crises, threats, and challenges in the global economic and geopolitical environment confronting us would have overwhelmed us, as indeed, it has many countries. Proudly, these sacrifices have paid off: I can now confirm that Kenya is safely out of the danger of debt distress and that our economy is on a stable footing,” said Ruto in his address to the country.
But how can Kenya’s High Risk Of Debt Distress be alleviated?
Closer Coordination To Address Kenya’s High Risk Of Debt Distress
One of the most crucial approaches to alleviating Kenya’s High Risk Of Debt Distress will be closer coordination between Kenya, the West, and China to develop effective and working approaches that will provide the best route for maximizing the recovery of outstanding loans to the country while maintaining the images of the Western world, China, and associated global lenders long-term friends of the country as a key partner within East Africa.
Besides that, private sector lenders based in Western Financial centers also need to be closely involved in helping manage Kenya’s high risk of debt distress. Most of these private entities have been key in helping dozens of developing economies resolve unsustainable debt situations. Additionally, the environmental, social, and governance (ESG) investor movement may lead some private institutional investors to be more accommodating than before in handling Kenya’s high risk of debt distress. As such, it is possible that meeting private sector requests for fair but fast and secure debt treatments will be in the interest of official debtors and creditors.
Need for meaningful dialogue on meeting Kenya’s medium to long-term financing needs
It is increasingly inevitable that Kenya’s high risk of debt distress will need to be addressed by meaningful dialogue to assess the country’s financing needs. The dialogue and resultant assessments will establish a common understanding of the country’s internal and external financing needs. This will also establish a framework for policy support that is beneficial to the government and its constituents.
Today, Kenya’s total external debt has crossed Ksh 10 trillion. This is a worrying sign as the government, through the Kenya Revenue Authority, works on frameworks to increase revenue collection and service maturing loans. The employed policies, backed by a controversial Finance Act 2023, have been widely unpopular and saw countrywide protests in opposition to the Act and other government policies soon after Ruto and his government assumed office.
A Framework to Address Kenya’s High Risk of Debt Distress
The International Monetary Fund and the World Bank have called for practical steps to improve the functioning of a clear framework on debt repayment by countries in debt. This has been dubbed the ‘Common Framework.’
Key components of the Common Framework include;
- A clearer timetable for the process concerning an individual country
- A comprehensive debt service payment standstill for the duration of negotiations;
- Greater clarity on how comparability of treatment will be enforced;
- Expansion of the Common Framework’s scope to include other highly indebted countries facing debt distress.
Besides that, there have been many other profoundly technical proposals from external experts to improve the effectiveness and functioning of the Common Framework since its establishment
The first two recommendations from the IMF and the World Bank are a good starting point for reform. The framework should continuously be updated to make it better and more attractive for both the lenders and the borrowers. This should forge a longer-lasting relationship and better financing for developing economies.
In November, THE IMF warned of ‘uncertainty over the country’s access to international bond markets.’
“Despite continued commitment to the implementation of the IMF-supported economic program, which is broadly on track, uncertainty looms over Kenya’s effective access to international bond markets. This uncertainty is exerting substantial pressure on liquidity, primarily due to the sizable Eurobond maturing in 2024. Against this backdrop, the authorities are actively mobilizing additional financing from their development partners, the IMF, and commercial sources while concurrently intensifying their efforts to enhance macroeconomic policies and implement structural reforms,” the global lender said in a press release dated November 15, 2023.
As a developing country, Kenya is endowed with plenty of resources that should generate adequate revenue to enable it to service external debt. However, public sector corruption remains one of the key impediments to the country reaching its full potential and servicing its debt accordingly. As such, Kenya’s high risk of debt distress is also a consequence of improper governance structures.
