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We undertake research and public education on key economic and topical issues in public affairs in Kenya and the region, and utilize the outcomes of the research for policy dialogue and to influence policy making. IEA Kenya’s key thematic areas are in Public Finance Management, Trade and Development, Futures Approach and Regulation and Competition.

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  >  Economy   >  Kenya’s public debt: How does it affect trade?

Kenya’s public debt: How does it affect trade?

Kenya’s current public debt figure stands at around Ksh 5.4 trillion, according to CBK’s website data, 49% of which is owed domestically and 51% of which is foreign. In East Africa, Kenya is among the top five nations with the highest Debt-to-GDP ratio, currently sitting at 47.6%, indicating its weakening ability to pay back its public debts from what its economy makes. On top of this, KRA’s inability to meet its revenue collection targets, on average 5% lower than the target, constrains the government’s efforts in debt servicing.

There have been growing concerns over the sustainability of the government’s current borrowing, as it is having mixed effects on sectors key in economic growth and development, especially on the trade sector.

Trade is represented in a country’s Balance of Payments account which is a statement of how much a country imports and exports in goods, services, and capital. The relationship between trade and debt is complex, however, there are key factors where the two intersect.

One such factor is in the exchange rate. For every unit of foreign currency borrowed, that amount has to be paid back in the same unit of currency, (e.g. Dollar) plus interest. If the value of the shilling in relation to that currency (e.g. Dollar exchange rate) fluctuates, then the amount that we have to pay back could increase or decrease accordingly. For example, a depreciation of the Kenyan shilling by 1 unit against the dollar would translate into an extra Ksh 48 billion to service the maturing debt.

Such an effect would make it very expensive for Kenya to pay back loans in the future and the impact could be that our foreign exchange reserves will be depleted, weakening our ability to buy goods and services in foreign markets and worsening our trade balance overall. Therefore, the more debt we have the less fiscal space we have to affect our trade position.

 

service ratio is the ratio of debt servicing payments to export earnings, and it serves a measurement of the debt burden against trade performance. A country’s international finance is better off if the ration is low.

However, despite the increasing amount of external debt Kenya’s trade has not seen much damage, boasting a strong shilling. The Current Account deficit has shrunk and Kenya’s Capital Account position improved by about 30% from January to March of 2019. The resulting situation has seen Kenya’s Balance of Payment position improve in 2019, with projections in 2020 to continue along with this trend. The progress can be partially attributed to the increasing Foreign Direct Investment (FDI) and Remittances, which debit the capital account and have reduced the amount of foreign exchange needed to settle any trade deficits.

Then begs the question: Why have the concerning levels of debt seemingly not had a negative effect on trade? The answer may lie within the recent posture of the Central Bank of Kenya.

In 2017, the IMF released a report claiming that the Kenyan Shilling was overvalued by 17.5 percent, further stating that the shilling risked being classified as “managed” rather than operating on the free forces of demand and supply. The claims were echoed by the East Africa Economic Outlook released this year which attributed Kenya’s exchange rate stability to the Central Bank’s monetary and fiscal stance that in turn, hindered the effects of exchange rate volatility on inflation. As a result, 2018 saw a comparatively moderate increase in the export price index which is statistically in line with improvements in the trade balance.

The case may be, that the CBK is placing a bandage on a potentially large wound protecting Kenyans from the harmful effects of the government’s decisions.

 

In the unpacking of the Budget Policy Statement 2019, parliament questioned the sustainability of debt along with the government’s inability to move forward on the Kenya Exports Guarantee Fund, which is noted as critical in increasing market access in order to earn the foreign exchange we need to service external debt. Moreover, the recently released National Budget for FY 2019/20 focuses on tax revenue growth and not serious expenditure consolidation, increasing doubts as to whether the government is aware of the effects of increasing debt on long term economic performance.

References

  1. https://www.centralbank.go.ke/public-debt/
  2. http://data.isdb.org/pxfdrcg/world-bank-development-indicators-wdi-2017-idb­aggregates?tsId=1070800
  3. https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/2019AEO/REO20 19 – East Africa .pdf
  4. https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/2019AEO/REO20 19 – East Africa .pdf
  5. http://www.parliament.go.ke/sites/default/files/2019-

02/Unpacking%20of%20the%202019%20Budget%20Policy%20Statement.pdf

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