According to the Central Bank of Kenya, external debt as of January 2021 accumulated to over 7.3 trillion Kenya shillings. This followed an increase of over 1 trillion Kshs from January 2020. 

What does this mean to the common mwananchi?

With a population of over 54 million, every Kenyan owed about USD 962 and produced USD 1169 a year in 2018 while each South African owed about USD 1434 and produced USD 12, 295.

Given the large number, it is unwise that the whole burden should fall on taxation.

While borrowing is not harmful to an economy, the concern lies in the source of funding. 

In fact, borrowing is an essential economic activity that facilitates trade, commerce and improves standards of living. It enables countries to fund investment projects which they may not be able to finance themselves.

When managed and utilised properly, it does not cause damage to the economy, neither will future borrowing be required to repay the loan. This is a sustainable debt.  

However, if the % of debt represented exceeds % of current exports, then it can be unsustainable. This simply refers to debt that cannot be repaid in the future, without borrowing more to try to foster development.

This occurs when interest and principal repayments on external debt are made in a foreign currency hence devaluing its domestic currency.

On one hand, a weak currency makes a country’s exports more competitive, which is good. On the other hand, it leads to high inflation rates because the cost of importing what it needs for production and consumption is higher.

Kenya imports more goods and services than it exports due to low domestic production. In  2018, Kenya raised USD 2 billion from selling bonds in the international debt market. This money was applied towards the government’s development initiatives and service existing debt.

In the case of China, it is one of the leading creditors in bilateral debt. Studies reveal that this poses a threat to Kenya’s debt crisis because of a lack of transparency in the loan agreements, improper prioritisation of projects, and weak accountability.

How can we foster sustainable debt?

• Build capacity for debt management to manage borrowing and lending better

In many developing countries, the capacity for managing the opportunities, costs and risks brought by different forms of borrowing remains weak. These should be integrated following political commitment and accountability.

• Increase Accountability; Improve Transparency

Without greater transparency, debt contraction, use and management are compromised through corruption and other forms. With a public disclosure mechanism of borrowing and spending in place, key stakeholders should examine these contracts and have the full information before other loans are made.