Kenya Debt
IMF Managing Director Christine Lagarde and Kenyan Finance Minister Henry Rotich in 2014.

The gap between taxes raised by the Kenya Revenue Authority (KRA) and the spending by government will average Sh500 billion for the next two years driven by excess state spending.

Kenya’s debt hit Sh5.5 trillion last week according to Central Bank of Kenya data and may climb to Sh6 trillion within a year.

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Ratings agency Moodys estimates that with revenue often underperforming budget targets and development spending bearing the brunt of the adjustment, they expect large deficits of around 6 percent of GDP to persist

“Kenya’s focus is on fiscal consolidation, but its limited track record in this space,” said Lucie Villa, a Moody’s Vice President-Senior Credit Officer and the report’s co-author.

In June, each of the five Moody’s-rated East African sovereigns – Kenya, Ethiopia, Rwanda, Tanzania, and Uganda – presented budgets for the next fiscal year, some of which included large infrastructure spending plans that will lead to continued fiscal deficits.

“In the next two years, we expect that fiscal deficits will be below those necessary to stabilize debt in all East African countries except for Uganda, where the debt burden is expected to rise, compared to declining or broadly stable debt burdens in the rest of the region,” said Lucie Villa.

Moodys predicts that interest rate increases beyond our forecasts, as well as economic and socio-political shocks that would likely result in a deterioration in government fiscal positions

Rwanda’s fiscal 2020 budget points to a larger fiscal deficit driven by infrastructure spending, while infrastructure-driven fiscal expansion to increase Uganda’s debt burden.

Tanzania and Ethiopia have been posting smaller deficits than regional peers, leading to a more moderate rise in their debt levels.

However, weaker tax receipts emphasize Ethiopia’s low revenue generation capacity while Tanzania’s ambitious revenue targets will be difficult to achieve.

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Although East African governments’ pro-growth fiscal policies will support economic expansion over the next two years, recurring fiscal deficits will constrain their creditworthiness at a time when they have less capacity to absorb future balance sheet shocks.

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