Long Term Sustainability of Kenya’s Debt under Different Scenarios
Date
2020-12-09
Authors
Nyaga, Robert Kivuti
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research consortium
Abstract
The fast-paced accumulation of debt today, at least from the Kenya government's
standpoint, is justified by the returns of the debt-financed investments. The rising
rate of debt accumulation and debt service triggers the fear that the debt ratios could
exceed the set sustainability thresholds under economic stress, raising the probability
of explosive debt dynamics, loss of market access, refinancing problems, and
possible debt distress. This study undertook to identify the likely effect of economic
shocks, such as depressed long-term growth, contraction of export earnings, rising
borrowing costs and elevated primary balance on sustainability of debt. Using a
Debt Sustainability Framework, the study found that persistently low economic
growth, including negative shock to exports, poses the greatest risk to sustainability
of external debt. Rising debt service on external debt and domestic debt could strain
foreign exchange earnings and local revenues in the medium to long term. Suggested
solutions include raising growth, moderating debt accumulation and reducing the
current account deficit through investment in the exports sector.