Kenya’s financial landscape is in the spotlight as the Auditor General’s office has officially begun a comprehensive audit of the country’s national debt. This move, driven by Finance Minister John Mbadi, is aimed at assessing the country’s debt, currently standing at a staggering 10.5 trillion shillings ($81.71 billion). The audit is part of the government’s broader efforts to ensure debt transparency and accountability amidst rising public concerns about economic stability.

The announcement of the audit follows growing public pressure and demands for greater clarity on the government’s borrowing, especially after anti-tax hike protests that rocked the country earlier in 2024. These protests forced the government to roll back a number of planned tax increases and raised questions about Kenya’s financial management.

Background and Rationale for the Audit

Kenya’s national debt has been a mounting concern for years, with analysts, economists, and international financial institutions warning about the risks of over-leveraging. In 2024, the country’s debt-to-GDP ratio stood at approximately 69%, higher than the 50% threshold set by the East African Community (EAC) for member countries. This level of debt has placed immense pressure on the country’s finances, leading to reduced public spending, cuts in social programs, and increased borrowing costs.

The decision to audit the debt came after widespread protests in June 2024, when more than 50 people were killed during demonstrations against the government’s finance bill. The bill proposed increasing taxes to generate more revenue for debt servicing, but was met with strong resistance from the public, labor unions, and civil society organizations. Protesters called for a halt to new taxes, and one of their core demands was a thorough audit of the national debt to identify any discrepancies or mismanagement in the borrowing process.

Finance Minister Mbadi, who had just been appointed in 2024, acknowledged these concerns during his parliamentary vetting process, promising to improve debt accountability. “We need to ensure Kenyans understand what their government owes, to whom, and why. We need more transparency in how we borrow and spend,” Mbadi stated during the vetting process.

The Role of the Auditor General

The Auditor General, a constitutionally mandated independent office in Kenya, has now taken on the task of conducting the debt audit. The office plays a critical role in maintaining financial oversight over government expenditures, ensuring that public funds are used lawfully and efficiently. The Auditor General’s office is funded by the state but operates independently to maintain its impartiality.

During the height of the protests, President William Ruto had appointed a committee to oversee the audit process. However, this decision faced backlash, as several appointees, including the head of the Law Society of Kenya, declined the positions. Critics argued that the audit should be performed by the Auditor General’s office, which already has the legal and technical mandate to undertake such a review. The government eventually conceded, and the Auditor General’s office was tasked with leading the debt examination.

Key Focus Areas of the Debt Audit

Although Finance Minister Mbadi has not disclosed the exact focus areas of the audit, it is expected that the investigation will cover a wide range of financial aspects. These may include:

1. Verification of Creditor Information: The audit will likely focus on verifying the amounts Kenya owes to various creditors, both domestic and international. A significant portion of Kenya’s debt is external, with key creditors including the World Bank, International Monetary Fund (IMF), China’s Exim Bank, and private international bondholders. Discrepancies between what has been reported by the government and what is actually owed could emerge, requiring further scrutiny.
2. Analysis of Debt Sustainability: The audit will also assess the sustainability of Kenya’s current debt levels. With debt servicing costs accounting for a large portion of the national budget, questions have arisen about whether the country can continue to meet its obligations without jeopardizing essential public services and economic growth. For instance, the interest payments on Kenya’s public debt in 2024 were estimated to consume nearly 30% of total government revenues.
3. Review of Loan Terms and Conditions: Another critical focus area may be the review of loan agreements and conditions. In recent years, Kenya has entered into several large-scale infrastructure projects, some of which are financed by Chinese loans with opaque terms. There has been growing concern that some of these projects may not deliver the anticipated economic returns, leaving the country saddled with debt obligations that are difficult to meet.
4. Use of Borrowed Funds: The audit will likely also investigate how borrowed funds have been used and whether the funds have been properly allocated to the intended projects. Mismanagement, corruption, and misallocation of resources have long been a challenge in Kenya’s public sector, with previous audits revealing cases where funds were diverted to unrelated or questionable expenditures.

Economic and Political Implications of the Audit

The debt audit comes at a critical time for Kenya as the country faces growing financial pressure from its debt obligations. The impact of the debt burden has been felt across the economy, with the government having to slash public spending in areas such as healthcare, education, and infrastructure development to prioritize debt repayment. As a result, economic growth has slowed, and social services have been strained.

Politically, the audit is a test for President William Ruto’s administration, which has faced increasing criticism over its handling of the economy and debt management. The protests that erupted in June 2024 were a clear indication of the public’s frustration with the government’s approach to raising revenue, particularly through taxation. While the government’s decision to abandon planned tax hikes temporarily quelled public unrest, the debt audit will play a crucial role in determining whether the government can regain public trust.

Moreover, Kenya’s international standing may also be affected by the outcome of the audit. The country’s credit rating was downgraded by the three main global rating agencies – Standard & Poor’s, Moody’s, and Fitch – following the protests. The downgrades reflected concerns over Kenya’s ability to manage its debt burden and maintain fiscal discipline. If the audit uncovers serious mismanagement or inaccuracies in the debt figures, it could further harm Kenya’s reputation in international financial markets and make it more difficult for the country to access affordable financing in the future.

IMF Fact-Finding Mission

Amidst these developments, a team from the International Monetary Fund (IMF) is currently in Kenya on a fact-finding mission. The IMF is reviewing Kenya’s economic performance and debt sustainability ahead of a board meeting scheduled for later in 2024, where a disbursement of $600 million is expected to be approved. The funds are part of Kenya’s ongoing Extended Credit Facility (ECF) agreement with the IMF, which was designed to support the country’s economic recovery following the COVID-19 pandemic and address fiscal imbalances.

The outcome of the debt audit will likely be of interest to the IMF, as it will provide critical information on Kenya’s debt levels and ability to meet its obligations. The IMF has previously raised concerns about Kenya’s rising debt and has called for fiscal reforms to address the underlying causes of the country’s borrowing needs.

Moving Forward: Debt Restructuring as a Potential Solution

As Kenya grapples with its growing debt burden, some experts have suggested that the country may need to consider debt restructuring as a way to ease its financial pressures. Debt restructuring involves renegotiating the terms of existing debt to make it more manageable, either by extending repayment periods, reducing interest rates, or writing off a portion of the debt. Several African countries, including Zambia and Ghana, have already pursued debt restructuring as a means of addressing unsustainable debt levels.

While Kenya has not yet reached the point of default, the government’s ability to service its debt in the coming years will depend on its ability to implement fiscal reforms, attract investment, and boost economic growth. The debt audit is expected to play a critical role in informing these decisions and shaping the country’s future economic policy.

In conclusion, Kenya’s national debt audit marks a significant step toward greater transparency and accountability in the country’s financial management. As the audit progresses, it will provide valuable insights into the state of Kenya’s public finances and help chart a course for addressing the country’s debt challenges. For now, all eyes remain on the Auditor General’s office as the nation awaits the findings of this crucial investigation.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

17th September, 2024