Experts: Kenya's burden to worsen as KRA risks missing revenue targets

Kenya continues to be assessed as being at high risk of debt distress despite successfully refinancing a $2 billion (Sh258 billion) Eurobond last year.

In the early months of 2024, the country contained the threat of default– albeit at the cost of higher interest rates on outstanding debt.

The revaluation of the shilling is also a contributing factor to the reduced fears of default- at least for the time being, experts say.

According to the Institute of Public Finance (IPF), a financial think tank, the elevated debt servicing costs mean that Kenya continues to breach all of the International Monetary Fund's (IMF) debt sustainability ratios, including the debt-to-GDP, debt service-to-revenue, and external debt service-to-exports.

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With already limited fiscal buffers, the Institute points out that Further shocks that reduce growth or increase borrowing needs could further put significant pressure on the limited fiscal buffers.

To reduce borrowing and any need for additional external financing, IPF says, there is a need for more fiscal restraint that may ultimately result in the re-building of both fiscal buffers and foreign exchange reserves which to date have not recovered.

“Staying on course with fiscal consolidation will be critical for maintaining macroeconomic stability and avoiding debt distress,” says IPF in its Macro Fiscal Analytic Snapshot for 2025.

This, the report says, will improve investor confidence and open the possibility for faster growth in credit to the private sector for productive investment.

In the recent past, Kenya has witnessed a concerning trend of businesses, both local and multinational,  exiting the market or significantly scaling down operations in recent years.

This includes multinational giants CMC Holdings, Procter & Gamble, Reckitt Benckiser, and GlaxoSmithKline.

The manufacturing giants have either relocated manufacturing operations or adopted distribution models. This is on the back of unpredictable business environments and tax hikes, making operations unfavourable.

According to Bernard Njiri, an analyst from the Institute of Public Finance, Kenya’s credit rating has not improved and is still at risk of borrowing at a higher cost.

In July 2024,  Kenya’s credit rating was downgraded, from B3 to Caa1, which is a downgrade, and at the time, the outlook was negative.

Global ratings agency Moody's revised Kenya's outlook to "positive" from "negative" on the back of potential ease in liquidity risks and improving debt affordability over time.

The agency affirmed Kenya's local and foreign-currency long-term issuer ratings at "Caa1", citing still elevated credit risks driven by very weak debt affordability and high gross financing needs.

Kenya’s struggle with heavy debt and looking for new financing lines was exacerbated by the nationwide protests against proposed tax increases.

The Moody’s report shows that if the government effectively manages its fiscal consolidation domestic financing costs will continue to decline ultimately, opening doors for external funding.

“What has changed is the outlook. The outlook is based on what is likely to happen in the future,” said Mr Njiri of the agency’s rating, noting that the downgrade remains as is, at Caa1.

“Our credit rating as a country has not really improved, and we are still at the risk of borrowing at a higher cost,” he said.

According to Mr Njiri, Kenya is still at high risk of debt distress  because of external debt sustainability indicators.

“Kenya continues to be assessed by the IMF to be at high risk of debt distress for breaching the upper thresholds of key debt sustainability ratios,” IFS Fiscal Analysis 2025.

Currently, Kenya has breached the ratio of the external debt values, as a percentage of exports.

“The threshold is 180. In 2024, Kenya was at 274, and in 2025, it is projected to be at 260 which is way above the threshold of 180, which is extremely bad,” Njiri said noting that the value of external debt as a percentage of exports, whose threshold is 15, Kenya was at 40- which is more than double of the threshold- in 2024 and is projected to hit 31.