Trends in External versus internal public debt for Kenya


Post Date: 18 September 2018   |   Category: Debt   |   Hits: 215



This is part two of  #NOW following last week’s in which we examined the trends in the domestic and external public debt in Kenya.   In this article we further focus on the public debt by looking at its share composition: Domestic versus External Proportions over time. We aim to answer the question, “Is the government borrowing heavily from external sources or internal sources?” The blog is informed by the understanding that it is not only the stock of debt but also its composition in terms of external sources and internal sources that comprise policy alternatives in debt management and have salient economic implications on Kenya’s economic progress.  
 
Since the debt crisis of the 1980’s, debates on the impact of external debt on the economic growth has raged on. Two main arguments put forward by scholars are that external borrowing would result in (i) debt overhang effect and (ii) Increased exposure to external shocks.   The empirical studies reveal that increased in the stock of external debt signals the high likelihood of increased taxes by the government in order to service the debt, thus discouraging private investment - a situation known among economists as debt overhang effect. On the other hand, researchers also find that increased external debt can potentially lead to diminished foreign reserves in a situation where the receipts from exports are used to service the external debt since payment is done in US dollars – a situation that often leads to reduced foreign reserves that are important in cushioning the economy against external shocks. Such economic shock may comprise weakened domestic currency, oil crisis and global economic slowdown.

Source: Central bank of Kenya 

The chart above illustrates trends in the proportion of external debt to internal debt from September 1999 to 2018 March. Across the period, debt management policies (external versus internal debt sources) can be examined across the three regimes of government: from President Moi’s regime, Kibaki’s and Uhuru’s regime. This enables us to evaluate the regime that has affinity to source the public debt from external sources. 

As at March 2018, the total stock of debt in Kenya amounted to Ksh 4.9 trillion, comprising Ksh 2.37 trillion domestic and Ksh 2.51 trillion external debt, working out to 51.4% external debt and 48.6% internal debt.

Number of the Week: 51.4%

  • The public debt stock amounts to (Ksh 4.9 trillion) as at end of March 2018, comprising of 51.4% of external debt.
  • The total stock of public debt increased from Ksh 1.78 trillion to Ksh 4.9 trillion at the end of February 2013 and March 2018, the respective proportions of the external debt were 46.7% and 51.5%, indicating an increase by 4.8 percentage points over the period.
  • On the other hand, between December 2002 and February 2013, the total stock of public debt increased from Ksh 0.63 trillion to Ksh 1.8 trillion. Over this respective period, the respective proportions of the external debt to total debt were 58.7% and 53.3%, indicating a decrease of 5.4 percentage points over the period.

This implies that, considering the share of external debt that the two regimes inherited, Kibaki regime worked to lower the ratio by favouring internal borrowing while Uhuru regime has increased the ratio of the by favouring high borrowing from external sources.

At the current state of the economy in which Kenya imports more than it exports with a merchandise trade deficit of Ksh 1.13 trillion up from in 2017 to Ksh 853.7 billion in 2016 , it implies there is high demand for the dollar in the international market compared to the shilling. Continued borrowing of the external debt could result in a further weakened Kenya’s currency and imported inflation due to short run adjustment of the economy to a steady rise in the importation over exports, thus affecting the cost of living.