How Kenya can alleviate economic distress in face of rising debt
1 weeks ago, 01:14
Kenya, like most other developing economies, is drowning in public debt, the necessary means to an end for governments to borrow to spur economic growth.
Accumulation of public debt in Africa has skyrocketed with no signs of slowing. Kenya’s public debt-to-GDP ratio is close to 20 per cent higher than what the International Monetary Fund would recommend. Critics say Kenya is in a stalemate situation — trapped by debt with irreversible detrimental impact on the economy.
On the one hand, and according to basic economic models, debt-financed public expenditure can reduce future economic growth by crowding out private investment. The scale of borrowing can increase interest rates, discouraging the private sector from making capital investments, rendering the whole thing cost-prohibitive.
In the most extreme of cases, an economic downswing may occur, reducing the amount of government revenues (most notably taxes), resulting in the need for additional money and, by extension, a vicious cycle of borrowing and crowding out.
But private investment behaves differently. These precarious times might be the genesis of the much-needed sustained private investment, which, historically, has been significantly underutilised. While public debt has felt like being stuck in the mud — particularly if the borrowings are ineffectively and inefficiently used — the wheels on private investment keep on turning.
Ernst and Young recently reported that Kenya is now the third-most attractive market in Africa for private funding, underscoring not only the potential of this diverse economy but also the high interest of global capital looking for opportunities.
To give credit where it is due, the efforts by the government to enhance private investment in the country have paid off and investment is forthcoming.
For example, over the past decade, the local private equity industry has evolved in terms of the range and depth of participants drawn to attractive valuations of assets and a relatively stable political environment. From foreign direct investment (FDI) through to the top global GPs establishing Africa-focused vehicles, and well-connected and increasingly well-capitalised local investors, private investment has grown.
Although significant headway has been made, policymakers need to keep the iron hot on economic reforms to offset the headwinds from external factors and build up financial resilience that can map out the path for improved and inclusive growth.
The private and public sectors need to combine tactics. The two are highly related and public investment significantly enhances private investment, particularly in terms of the large ticket items such as infrastructural development.
The government, therefore, needs to continue to strive for robust and appropriate macroeconomic policies that can secure a moderate budget surplus without imposing controversial interest rates. In turn, private investment needs to be embraced as a viable dynamic force to co-lead the country into a well-equipped economy and lay the foundation for a more prosperity.
Ms Kiire is a senior consultant at africapractice. [email protected]
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