Restructure the debt, not Kenya’s future

This story has significance for readers across Kenya and beyond.

Kenya’s debt problem is no longer merely a technical matter for the Treasury. It has become a political economy question.

What kind of economy can Kenya build when an ever-growing share of public resources is committed to servicing yesterday’s borrowing? Public debt had reached Sh12.86 trillion by April this year, equivalent to 69.4 per cent of the Gross Domestic Product (GDP), according to Treasury.

The more important question is not simply how much Kenya owes, but what the country is getting for the debt. Borrowing to finance productive infrastructure can generate growth and revenue.

However, borrowing increasingly to refinance existing obligations creates a vicious circle – borrow to repay, tax to borrow and borrow again to service the debt. Debt then becomes a mechanism for postponing rather than solving the fiscal problem.

The imbalance between debt service and development expenditure makes this worrying. When debt repayment absorbs resources that could finance infrastructure, agriculture, healthcare, education and industrialisation, the government sacrifices the investments required to expand the economy.

The issue is, therefore, not debt alone, but whether Kenya is borrowing to transform its productive capacity or simply taking loans to maintain an existing debt structure.

This is where the views of leading economists become relevant. Joseph Stiglitz has argued for stronger mechanisms for sovereign debt restructuring, warning that delayed resolution can deepen socio-economic costs.

Carmen Reinhart’s extensive research on sovereign debt crises demonstrates that restructuring and debt relief can be important components of recovery from debt overhang.

Olivier Blanchard, meanwhile, emphasises that debt sustainability depends not merely on the debt-to-GDP ratio but also on the relationship between economic growth, interest rates and the capacity of the government to stabilise debt.

Kenya should, therefore, begin a serious conversation about orderly sovereign debt restructuring. Note that restructuring is not synonymous with reckless default. It is a negotiated adjustment of maturities, interest rates and repayment schedules designed to restore sustainability and create fiscal space.

The objective is not to escape responsibility for debt, but to prevent repayment from destroying the capacity of the economy to grow. Barbados provides an important precedent.

Under Prime Minister Mia Mottley, the Caribbean island nation undertook a comprehensive debt restructuring in 2018. The International Monetary Fund (IMF) found that the restructuring substantially reduced debt and financing pressures.

The lesson is not that Kenya should emulate Barbados, but that restructuring can be used as a policy instrument to restore fiscal space when the existing debt structure becomes untenable.

Ghana provides a more recent African example. It completed its domestic debt exchange in 2023 and its Eurobond restructuring the following year, while continuing negotiations with official creditors.

By 2025, the IMF reported significant progress in Ghana’s debt restructuring and improvements in investor confidence. Accra demonstrates that restructuring can be embedded within a broader programme of fiscal consolidation, financial-sector protection and economic recovery.

Ethiopia offers another important African case, though its restructuring is still evolving. After defaulting on its S$1 billion Eurobond in 2023, Ethiopia negotiated with official and private creditors under the G20 Common Framework.

This month, official creditors approved a preliminary agreement with private investors to restructure the Eurobond, bringing Ethiopia closer to emerging from default.

The Ethiopian experience also illustrates that restructuring can be lengthy and politically difficult, particularly where creditors have different interests.

Sri Lanka provides the cautionary lesson. Its 2022 default followed a severe fiscal and balance-of-payments crisis, forcing a comprehensive restructuring of external and domestic obligations.

According to the IMF, external creditors forgave about $3 billion and restructured another $25 billion, while the country subsequently regained access to international bond indices.

The lesson for Kenya is not that default is desirable, but that allowing an unsustainable debt burden to persist can ultimately make adjustment far more painful.

Kenya must, nevertheless, proceed carefully. Banks, pension funds, insurance companies and individual investors hold substantial government securities. A disorderly restructuring could destabilise the financial system and transfer the sovereign crisis into banks and pension funds.

Any restructuring must, therefore, be negotiated, credible and carefully designed to distribute the burden while protecting financial stability.

The fundamental principle should be simple – Kenya should not borrow merely to repay yesterday’s borrowing. Debt should finance assets that increase productivity, employment, exports and future government revenues.

The choice is increasingly between perpetual refinancing – borrowing more, taxing more and sacrificing development – or restructuring the debt burden and using the resulting fiscal space to rebuild productive capacity.

Kenya does not need to restructure its future; it needs to restructure the debt that is preventing it from financing that future.

Morvin Achila is affiliated with Kenyatta University and writes on economics, governance, and development policy in Africa. Email: [email protected]

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Reporting originally appeared via Business Daily. Read the full source for additional context.