World Bank says Kenya's debt racing to danger zone

Kenya is building a potentially dangerous mountain of debt that could in the long run expose the economy to systemic risks, the World Bank has warned in a new report.

The World Bank warns in the report that while Kenya’s public debt remains sustainable, the margin for further debt accumulation is narrowing at an uncomfortably rapid pace and exposing the country to potentially difficult times ahead if the borrowing spree is not tamed.

“Although public debt remains sustainable, margins for manoeuvre are rapidly narrowing,” the bank says in its latest economic update on Kenya that was released on Monday.

Runs contrary

“With an over 13 percentage point of GDP increase in the debt-to-GDP ratio within a three-year period, and with debt levels over 50 per cent of GDP, and fiscal deficits well above the medium term 4.5 per cent target, the fiscal policy space is fast eroding and margins for further debt accumulation are narrowing,” the report says.

The warning runs contrary to the Kenyan Treasury’s position that the national debt was manageable and that there was room for accumulate more debt without compromising economic growth.

The World Bank says its conclusion is informed by a recent Debt Sustainability Analysis (DSA) it jointly did with the International Monetary Fund, noting that the analysis highlights the precarious situation Kenya was potentially faced with.

Public expenditure

The analysis found that despite the fact that risk of distress for the current debt level was still low, the rate at which it was rising was a cause of worry.

Kenya’s public debt increased from 42.1 per cent of GDP in 2012/13 to 55.1 per cent of GDP in 2015/16, on the back of a massive increase in development spending.

The World Bank says the situation was further compounded by the fact that growth in public expenditure had far outstripped growth in revenues, creating a major imbalance.