Is Kenya’s public debt sustainable? An NARDL approach

Abstract

The macroeconomic and financial health of an economy depends on the sustainability of its debt. It speaks to the government's capacity to fulfill its present and upcoming financial commitments. The Debt Sustainability Threshold is used as a warning when a nation has reached a risky level of debt and should implement fiscal and monetary policies to reduce it. Kenya’s debt rose from 1.8 trillion in 2013 to 9.182 trillion in January 2023. In 1990, Kenya’s debt-to-GDP ratio was 15.2%. In 2022, the debt-to-GDP ratio reached 72.3%, 12.3% more than the IMF’s middle-income economy recommendation of 60.0%. By 2022, the country’s debt service to revenue ratio was 47.9%, 17.9% above the IMF’s 30.0% recommendation, indicating how public debt servicing affects the country’s budget. This prompts the question: is Kenya’s public debt level sustainable? Sustainability is critical to an economy’s financial and macroeconomic well-being. It refers to the government’s ability to meet its current and future payment obligations. The debt Sustainability threshold is used to signal a country’s entry into a dangerous debt level, triggering fiscal and monetary policies to correct it. The measurement of public debt is done in both absolute and relative terms. In absolute terms, public debt is defined as the total value of liabilities that obligate a borrowing government to pay the principal and chargeable interest. In terms of relative sustainability, public debt is measured in relation to the country’s economic potential, particularly its ability to pay off the debt. In this regard, the percentage of debt to GDP ratio is the most used relative measure of debt in the literature. From the findings, Kenya’s public debt is not sustainable in the long-run if the government continues to borrow.