Long Term Sustainability of Kenya’s Debt under Different Scenarios

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Nyaga, Robert Kivuti
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African Economic Research consortium
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.