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World Bank cautions Kenya to tame borrowing spree

bycitibusinessnews
November 1, 2016
in Africa, East Africa, Top Stories
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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 newly-released 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.

“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 Treasury’s position that the national debt is manageable and that there is 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 is potentially faced with.

The analysis found that despite the fact that risk of distress for the current debt level is still low, the rate at which it is rising is 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 is further compounded by the fact that growth in public expenditure has far outstripped growth in revenues, creating a major imbalance.

“Revenue is projected to grow by 2.3 percentage points in 2016/17 to 21.3 per cent of GDP compared to 19 per cent of GDP in 2015/16. Expenditure, on the other hand, is projected to increase by 3.7 percentage points of GDP during the same period,” the report says.

An ever expanding fiscal deficit, which is projected to be higher in 2016/17 should also be a cause for worry, the bank warns, adding that contrary to the expected decline in the fiscal balance as proposed in the 2016 Budget Policy Statement, the 2016/17 Budget suggests an increase in the fiscal balance to -9.4 per cent of GDP compared to -7.2 per cent of GDP in the previous fiscal year.

The warning comes as the Treasury is preparing for fresh foreign borrowing — partly to finance the Sh691.5 billion deficit in this year’s Sh2.2 trillion budget.

Kenya has committed to borrowing billions of shillings to finance mega public infrastructure projects, including the ongoing construction of the standard gauge railway (SGR) line.

The country has in the past four years borrowed billions of shillings to finance power generation and road construction projects and recent forecasts indicate that the borrowings could soon take the debt load past 60 per cent of GDP.

–

Credit: Business Daily

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