Working Paper No 33 of 2023 on Public Debt in Kenya: Management and Sustainability

Abstract

Kenya witnessed accelerated debt accumulation in the post-2010 period. The period was characterized by heavy infrastructural development, implementation of devolved system of government and multiple shocks including the COVID-19 pandemic. As of March 2023, total public debt was Ksh 9.4 trillion (64.7% of GDP) amounting to 94 per cent of the debt ceiling. Domestic debt stood at Ksh 4.5 trillion (48% of the total debt). The debt ceiling was raised in June 2022, raising it to Ksh 10 trillion, to facilitate the government in meeting its financial obligations effectively. The composition and structure of debt has evolved over time. To minimize exchange rate risks associated with the external debt, the government adopted a strategy to increase the composition of domestic debt. The public debt mix changed from 60:40 in 2000 to 52:48 in March 2023 for external to domestic debt, respectively. Furthermore, the domestic debt saw emphasis on long-term government securities. The share of treasury bonds in total domestic debt was 83 per cent in March 2022. The preference for long-term maturities was in line with the government strategy to minimize refinancing risks. Commercial banks are the largest holders of government securities. Further, with increased demand to finance infrastructure spending and favourable external financial conditions especially in the period following the financial crisis in 2008, commercial borrowing increased through issuance of syndicate loans and sovereign bonds. Further, the classification of Kenya as a lower middle-income country in 2014 implied that the country had the ability to access non-concessional funding from even the multilateral development banks.