What Kenya needs to do to escape its growing debt crisis

Kenya’s public debt has evolved significantly over the past two decades, from manageable levels of public debt in the early 2000s to a national concern in 2024.

This journey, marked by ambitious infrastructure projects and external shocks, brought the country to a crossroads.

New Finance Minister John Mbadi faces the difficult task of implementing the 2024/2025 budget amid a heavy debt burden, rising inflation and widespread public opposition to tax increases. Kenya’s future choices will determine whether it can meet its debt challenges and ensure a stable economic future.

In 2002, Kenya’s public debt was Sh630 billion, equivalent to 55% of the country’s GDP. At the time, most of the debt was domestic and government borrowing was strictly controlled.

The election of President Mwai Kibaki in 2002 ushered in a period of economic reforms, with a focus on boosting growth through infrastructure development.

Under Kibaki’s leadership, Kenya has launched important infrastructure projects, but borrowing has remained within sustainable limits. The country’s economy has grown steadily, with GDP growth averaging 5% per year. Improved tax collection and prudent fiscal policy have helped keep the debt-to-GDP ratio stable, ensuring that Kenya’s growing ambitions do not lead to an unsustainable debt burden.

Kenya’s public debt profile changed dramatically with the election of President Uhuru Kenyatta in 2013. The Jubilee administration pursued an ambitious development agenda, launching large infrastructure projects such as the Standard Gauge Railway (SGR) and expanding the country’s road network and energy production.

However, these projects are costly. To raise funds, Kenya has increasingly turned to external borrowing, particularly from China and international financial markets. By 2020, the country’s public debt had soared to 7 trillion shillings, nearly 70% of GDP.

As debt levels rise, so too do concerns about sustainability. More and more government revenues are being diverted to servicing debt, leaving less for basic services like health and education. The rapid accumulation of debt is beginning to put a strain on Kenya’s finances and raising questions about the long-term viability of this borrowing strategy.

Kenya’s public debt is set to exceed Sh10 trillion and debt-to-GDP ratio to exceed 75% by 2024. The country now faces a daunting challenge: how to manage the growing debt burden without undermining economic stability.

On August 2, global credit rating agency Fitch downgraded Kenya’s sovereign rating from “B” to “B-”, citing increased risks to public finances after the Kenyan government abandoned key revenue measures following the Generation Z protests. The downgrade of Kenya’s credit rating has led to increased borrowing and debt restructuring costs, which has put more pressure on the country’s finances.

Kenya’s public debt trends from 2002 to 2024 show a clear pattern: a steady increase in borrowing, especially from external sources, to finance large infrastructure projects. While these projects have boosted economic growth, the rapid growth in debt has raised significant concerns about the country’s ability to sustain this level of borrowing.

To address the challenges posed by rising public debt, Kenya must adopt a series of prudent economic policies to ensure long-term sustainability. First, Kenya needs to improve its tax collection mechanism and reduce its reliance on borrowing. Broadening the tax base, combating tax evasion, and using technology to improve efficiency will be key.

Second, the government must prioritize projects with the highest economic returns. Implementing a zero-based budgeting approach, where every expenditure is rationalized each year, can help align government spending with national priorities.

Third, Kenya should explore options to restructure its existing debt to ease immediate fiscal pressures. This could include negotiating with creditors to extend repayment periods, lower interest rates, or consider debt-for-development swaps, where debt is forgiven in exchange for investment in key sectors such as education or health.

Fourth, it is critical to reduce reliance on public debt by encouraging greater private sector participation in infrastructure projects through public-private partnerships (PPPs). By sharing the fiscal burden with the private sector, the government can achieve its development goals without exacerbating the debt situation.

The fifth point is about diversification of Kenya’s economy, which is still heavily dependent on a few key industries and is therefore vulnerable to external shocks. The government should invest in economic diversification and promote industrial development focusing on manufacturing, technology and value-added agriculture. A more diversified economy will generate additional revenue.

Finally, strong institutions are essential for effective debt management. Kenya should strengthen the capacity of institutions responsible for managing public debt, such as the Kenya Treasury and the Central Bank. Transparent and accountable public debt management will help build investor confidence and attract more favorable financing terms.

To ensure that Kenya can continue to grow without being crushed by debt, the government must adopt prudent economic policies that focus on raising taxes, rationalizing spending, restructuring debt, promoting private sector participation, diversifying the economy, and strengthening the institutional framework. By taking these steps, Kenya can mitigate the risks posed by high public debt and ensure a more sustainable economic future.