Kenya is increasingly at risk of debt distress, despite successfully raising $2 billion from a Eurobond sale last year. A new report by the Institute of Public Finance (IPF) reveals the country has surpassed key debt sustainability thresholds set by the International Monetary Fund (IMF). This troubling development places Kenya’s fiscal health under heightened scrutiny, with analysts warning that any economic shock could severely impact the country’s growth prospects.

The 2025 Macro Fiscal Analysis Snapshot (MFAS) issued by IPF paints a concerning picture of Kenya’s fiscal trajectory. The report highlights that the nation’s debt ratios—such as the debt-to-GDP ratio, debt service-to-revenue ratio, and external debt service-to-exports ratio—have breached all IMF indicators for sustainable debt management. These benchmarks, established by the Bretton Woods institutions, serve as critical warning signs of a country’s ability to manage its financial obligations without jeopardizing economic stability.

Debt Ratios Breached and Risks Mounting

Bernard Njiiri, a senior research analyst at IPF, pointed out that Kenya’s debt ratios have now exceeded the IMF’s cautionary thresholds, raising red flags about the country’s financial resilience. “As we speak, Kenya has breached all these parameters set by the IMF,” Njiiri stated. “Any shocks to the economy—be it from reduced growth, heightened borrowing costs, or external pressures—could have far-reaching effects that hinder economic progress.”

The MFAS underscores that Kenya’s fiscal buffers are already strained, with external debt service payments placing significant pressure on the government’s finances. Should there be a downturn in economic activity or an escalation in borrowing costs, the country’s ability to service its debt could deteriorate rapidly. This comes at a time when the government’s foreign exchange reserves have yet to fully recover from previous fiscal and economic challenges.

The IPF report warns that continued borrowing without addressing fiscal prudence could exacerbate the situation. The government is urged to implement greater fiscal restraint, including scaling back borrowing, improving tax collection efficiency, and exploring alternative ways to shore up fiscal reserves.

Government Expenditure and Economic Policies under Scrutiny

Recently, Kenya’s fiscal policies have been under intense scrutiny. Last week, economist Ashish Chadda raised alarms over the Treasury’s Budget Policy Statement (BPS) for the fiscal years 2025/26 to 2027/28. Chadda criticized the planned surge in government expenditure, which is projected to increase by over Sh1 trillion between 2023 and 2026. He warned that this sharp rise in spending, fueled by new tax measures, could place additional strain on an already burdened population.

Chadda also expressed skepticism regarding the sustainability of the expected revenue increases. A significant portion of the revenue growth is anticipated to come from new taxes, which could be difficult to sustain without burdening consumers further. “These new taxes might have adverse effects on the economy,” Chadda stated. “They could lead to higher living costs for ordinary Kenyans and potentially stifle economic activity.”

The mounting concerns about Kenya’s fiscal trajectory have sparked debates among policymakers, economists, and business leaders. While the government’s fiscal policy aims to stimulate economic growth, critics argue that without careful planning and prudent management, the strategy could lead to deeper debt distress.

Economic Stability Hinges on Fiscal Prudence

In the wake of these challenges, the IPF report calls on the government to focus on rebuilding fiscal buffers and strengthening foreign exchange reserves. The current economic situation demands a delicate balancing act—one that safeguards growth while simultaneously preventing debt vulnerabilities from spiraling out of control.

The government’s recent decision to issue a $2 billion Eurobond was seen as a measure to shore up short-term financing needs. While the immediate proceeds may help alleviate fiscal pressures, analysts caution that such financing approaches should be complemented by sustainable fiscal policies that address long-term economic stability.

Moreover, the IPF report emphasizes that any external shocks—whether from global market fluctuations, commodity price volatility, or geopolitical tensions—could swiftly escalate Kenya’s debt burdens. The economy’s reliance on external borrowing leaves it vulnerable to changes in global financial conditions, which could further strain fiscal health.

Calls for Comprehensive Reforms and Diversification

The report also highlights the need for more comprehensive economic reforms that extend beyond debt management. Diversifying Kenya’s economy away from over-reliance on external borrowing and oil revenue is critical. The government must pursue policies that promote sustainable investment in key sectors such as agriculture, manufacturing, and technology, while also fostering stronger partnerships with international development agencies and private investors.

Furthermore, Njiiri’s analysis suggests that Kenya must strengthen its revenue collection mechanisms to broaden its fiscal base. Tax reforms aimed at improving efficiency and expanding the tax net could be instrumental in creating a more sustainable fiscal framework. “We cannot continue to rely solely on borrowed funds to meet fiscal needs,” he added. “Diversification of revenue streams and enhanced tax compliance will be essential in creating economic resilience.”

Economic Outlook and Long-Term Sustainability

Despite the current risks, there are signs of resilience in Kenya’s economy. With the right fiscal and monetary policies, the country could stabilize its debt situation and achieve sustainable economic growth. The IMF has also expressed readiness to support Kenya in its efforts to reform fiscal governance and manage debt sustainably. However, the success of these initiatives depends largely on the government’s commitment to transparency, accountability, and sound economic management.

In conclusion, while the IMF has acknowledged Kenya’s challenges, it also recognizes the country’s potential to overcome its debt vulnerabilities. The road ahead will require strong leadership, a commitment to prudent economic management, and collaborative efforts from both public and private sectors. For Kenya, the stakes are high—economic stability today will determine its future growth prospects in the years to come.

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By: Montel Kamau

Serrari Financial Analyst

23rd January, 2025