Public Debt Analysis Blog Series – Part 2: The worrying trend of external public commercial borrowing in Kenya.

John Mburu

In part 1 of this blog series[1], we discussed why Kenyans should be worried about the level of public debt. We argued that the increase in the share of commercial debt in Kenya imposes huge fiscal and welfare costs. In the current blog, we discuss how the changing composition of external debt has contributed to the high cost of public debt. We also discuss how the focus on external debt has distracted the pundits, public, and policymakers to a larger problem in Kenya i.e., domestic debt. The level of external debt in Kenya has seen tremendous growth since 2014. Between 1999 to 2013 the external debt grew at an average annual growth rate of 8.6 percent compared to 22.6 percent between 2014 to 2020. By 2020, Kenya’s external debt was Ksh. 3.79 trillion up from Ksh. 0.31 trillion in 1999. Several developments in external borrowing are crucial to understanding the risk of external debt in Kenya. First, between 2014 to 2020, the share of commercial debt in total external debt increased from 0.07 percent to 31.4 percent. Second, the share of debt from China increased from 5 percent to 21 percent between June 2011 to June 2020. Lastly, the share of dollar-denominated debt increased from 29 percent to 67 percent between June 2011 to June 2020[2]. Figure 1 shows the composition of external debt in Kenya.

Figure 1: The changing composition of external debt in Kenya[3]

The discussion above shows that external debt since 2010 has shifted to commercial debt and become more concentrated in terms of bilateral lenders and currency denomination. This exposes Kenya to several challenges. First, the rapid increase in external debt between 2014 and 2020 also lead to a rapid increase in debt servicing costs. Interest rate payment to external debt as a share of total revenues in Kenya increased from 3.9 percent in 2012/13 to 14.7 percent in 2018/19 while debt redemption of external debt as a share of total revenue increased from 1.2 percent in 2012/13 to 6.1 percent in 2018/19[4].  Second, the high level of commercial debt exposes Kenya to the rollover risk and whims of international financial markets. Third, the high share of dollar-dominated debt increases Kenya’s vulnerability to external shocks that can lead to the depreciation of Kenya shilling against the dollar.

Lastly, although the external debt composition has shifted to commercial debt in recent years, a sizable amount of external debt is still owed to multilateral lenders. A quarter of external debt in Kenya is owed to IDA which usually offers debt in concessional terms. However, the share of commercial domestic debt in total public debt in Kenya was around 46 percent in June 2020 while the share of commercial external debt in total public debt was only 16 percent. Hence, domestic debt is likely to exert more pressure on the government revenues than external debt. The focus on external debt over the years distracts the public, the pundits, and the policymakers from the high level of domestic debt. The high level of domestic debt exacerbates the risk of debt distress.


[1] http://expertise.co.ke/2021/08/18/public-debt-analysis-blog-series-part-1-should-kenyans-be-worried-about-the-level-of-public-debt/

[2] Source: Various National treasury of Kenya Annual Public debt reports.

[3] Source: Various National treasury of Kenya Annual Public debt reports.

[4] Various Kenya National Bureau of Statistics Statistical Abstracts and Central Bank of Kenya

Leave a Reply

Your email address will not be published.