Inflation rate to increase Kenya’s debt by Sh15.6 billion in two years – IMF
Kenya's debt to increase by Sh15.6 billion in two years as result of current inflation rate according to IMF
Kenya’s debt to increase by Sh15.6 billion in two years as result of current inflation rate according to IMF.
According to the International Monetary Fund (IMF), if the current inflationary pressure does not abate, Kenya’s public debt will increase by Sh15 billion over the course of the next two years.
The lender asserts in its public survey report on the effects of inflation on countries that surprise inflation raises debt-to-GDP ratios when it becomes chronic and expected over time.
This is for countries with debt exceeding the 50 per cent mark of GDP.
“Each percentage point of unexpected ‘surprise’, increase in inflation reduces public debt by about 0.6 percentage points of GDP, with the effect lasting for several years,” IMF says.
“However, when it becomes persistent and expected over time, it stops contributing to declining debt ratios, which in turn, adds on the ratios.”
Similarly, deficit-to-GDP ratios initially decrease when spending falls short of the increase in the output’s monetary worth. Such effects, according to the lender, wane even more quickly.
The IMF estimates that two years following a shock, in this case the Covid-19 shock, ongoing and anticipated inflation will increase the country’s debt-to-GDP ratio by nearly 0.1%, or roughly Sh15.6 billion of Kenya’s present debt.
As of the end of June of this year, the present value of the country’s debt as a proportion of GDP is estimated to be 60%, or Sh9.4 trillion.
Data by the National Treasury in December last year shows the government owed Sh4.67 trillion in external debt and Sh4.47 trillion in domestic debt, forcing it to dip into forex reserves for loan servicing in the wake of maturing foreign debts.
The government has however committed to cutting down the country’s debt, projecting a decline to about 53.1 per cent of GDP in the financial year 2025-2026.
This is under the fiscal consolidation programme policy stance outlined in the 2023 Budget Policy Statement.
Tough economic times on the back of rising inflation has been a contributor to the rising borrowing and costs of borrowing further pushing up the country’s debt.
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Inflation for the month of March stood at 9.2 per cent, still way above the statutory requirement of 7.5 per cent.
The inflation had eased from 9.1 per cent in December 2022 to nine per cent in January 2023, after five-year highs of 9.5 per cent in November and 9.6 per cent in October.
With further highs above the pre-covid levels, the lender reiterates that it will pose substantive pressure on the rising debt.
However, last week, CBK exhumed confidence that the high cost of living will ease in the coming months.
The survey examined Kenya, Colombia, Finland, France, Mexico and Senegal.
It also established the impact of rising inflation on households in terms of consumption and income.
Between Q2 of 2021 and 2022, the rising inflation levels in the country hit the poorest households the most, reducing their consumption by about 2.5 per cent.
Their incomes declined by about 0.5 per cent.
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