Kenya Railways Corporation has defaulted on a Sh167.5 billion loan borrowed from China for the Standard Gauge Railway (SGR), representing 62% of the total Sh266.5 billion debt owed to the Treasury by State agencies.
The default triggers penalties estimated at Sh1.6 billion, while the total SGR debt has ballooned to Sh737.5 billion from the original Sh539 billion borrowed from China Exim Bank, marking a 36.8% increase due to unpaid interest and principal installments.
The railway's financial struggles stem from insufficient revenue generation, with SGR operations posting an operating loss of Sh7 billion over two years despite earning Sh73.4 billion from cargo and passenger operations over five years to 2023.
While the railway improved travel times significantly - reducing Nairobi-Mombasa journeys from 12 to 4 hours for passengers and 24 to 8 hours for cargo - it faces stiff competition from road transporters, operating at 36% idle capacity despite a contractual requirement for the Kenya Ports Authority to provide up to six million tonnes of cargo annually by 2024.
As a result, taxpayers are bearing the burden of loan repayments to avoid the country being labeled a defaulter.
Amid these financial strains, the Kenyan government collected KSh 176 billion through various levy funds in the financial year ending June 30, 2024, yet transparency over their allocation remains elusive.
-Railway Development Levy - KSh 32 billion
-Housing Development Levy - KSh 54 billion
-Petroleum Development Levy - KSh 24 billion
-Road Maintenance Levy - KSh 66 billion
Simultaneously, it is seeking an additional KSh 174.6 billion in tax revenue for 2024/25 via proposed amendments to tax and business laws, aiming to bridge budget deficits and manage escalating public debt.
The National Treasury report on public debt says Kenya's total public debt stock now stands at Sh10.6 trillion.
The Report, shows Kenya's total domestic debt now stands at 51 per cent having increased from 47 per cent in 2022-23 financial year. This is while external debt dropped to 49 per cent in the period from 53 per cent in 2022-23.
Additionally, it indicates external debt service payments rose from Sh402.4 billion to Sh756 billion, a growth of more than three times, in the 2022-23 financial year, when external debt service increased by Sh96 billion.
The report also shows the Kenyan government paid Sh807 billion to service domestic debts.
The increased payment is largely due to the maturity of the $2 billion (Sh260 billion at current exchange rate) Eurobond that put the country in a tight fiscal space in the first half of the 2023-24 financial year with possibility of default.
Treasury has listed strategies to tame this appetite as the report shows the government borrowed close to Sh580 billion from the local market in the year to June 2024
The report, says that the end of June 2024, the domestic debt stock was Sh5.4 trillion. This is an increase of Sh578 billion, which is 12 per cent more than the Sh4.8 trillion domestic debt stock as at the end of June 2023.
“The increase was attributed to the growth in the stock of Treasury bonds during the fiscal year to meet the government’s financing needs,” the report says.
“The stock of Treasury bonds was Sh4.6 trillion in June 2024 up from Sh4.0 trillion in June 2023, while Treasury bills stock was Sh615.9 billion in June 2024, up from Sh614.7 billion in June 2023.” the Report adds.
Kenyans paid Sh1.6 trillion in 2023-24, up from Sh1.2 trillion, to service the public debt. Of this amount, Sh840 billion was interest with the rest going to repayment of the principal amount.
According to the report, Interest on domestic debt was Sh622.5 billion while that on external debt was sh218.2 billion.
Despite falling inflation and a stable Shilling, The International Monetary Fund (IMF) has cautioned Kenya against a larger interest rate cut, warning that easing monetary policy risks price stability and losing the ability to attract external investment flows.
This stance clashes with recent statements by the Treasury and the Central Bank of Kenya (CBK), which have advocated for lower rates to stimulate economic growth and curb rising non-performing loans in the banking sector.
The IMF argues that the differential between Kenya's real policy rate and the US nominal rate remains narrower than pre-Covid-19 levels, and that rate cuts could lead to a sharp rise in the cost of living once economic activity rebounds.
Treasury Cabinet Secretary John Mbadi and CBK governor Kamau Thugge have both suggested that there is scope for further easing of monetary policy, citing slowing economic growth and declining private sector credit growth.
However, the IMF maintains that the tight monetary policy stance remains appropriate given the risks to price stability and external sustainability, even as headline inflation has fallen to a 17-year low and the shilling has gained against the dollar.