Kenya can still afford 5 years of a budget deficit in the current state of its public finances, according to the FY2020-21 Budget Act. The projected budget deficit, which is the surplus of government expenditures to be made when budget revenue is lower, will be KSh600 billion Kenyan shillings ($5.57 billion).

This level of deficit is in line with the average of the previous 5 fiscal years and even below the budget deficit in FY 2019-20. The government of this country, which is the largest economy in East Africa, can at this rate allow itself to run a budget deficit for just over 4 more years. Indeed, the measurement of debt sustainability was changed in October 2019.

Rather than having a maximum debt level of 50% of GDP as a benchmark, the country was allowed to borrow up to a maximum level of KSh9 trillion. However, according to official statistics, Kenya's public debt is currently KSh6,300 billion, which still leaves room for borrowing up to KSh2,700 billion. This is 4.3 times the average budget deficit of the last 5 fiscal years.

The news is expected to appeal to investors who are financing this deficit. In turn, the government is allocating a significant part of its resources to debt repayment. In 2019, debt servicing accounted for 45.2% of budget revenues. The analysis of Kenya's ability to consistently repay its debts differs, however, depending on the criteria selected.

According to the International Monetary Fund, which takes into account the weight of public debt on GDP, or the weight of external debt in export revenues, the country has become over-indebted. At the end of 2019, Kenya's public debt represented the equivalent of 62.5% of its GDP. With rather modest growth projections, the 70% threshold will quickly be reached in 2021.

According to Kenya-based analysis and management firm Cytonn Investments, the country's high debt levels have become a concern, with both the debt-to-GDP ratio and the debt-service-to-revenue ratio exceeding the recommended threshold. This adds up to the challenges stemming from the coronavirus pandemic.

For the time being, the country can enjoy positive sentiment from international debt investors on its Eurobonds. On the side of pessimists, this does not reflect strong fundamentals for the Kenyan economy, but a short-term gain effect due to the low yield opportunities in the debt market in developed countries.

Idriss Linge