Protestors in Kenya wanted the government to reverse austerity legislation.
The problem though is the country’s debt:
Kenya’s Debt
Kenya borrowed billions for infrastructure projects. They wanted to build roads, railways, dams, and spread electrification.
As a result, Kenya owes money to the I.M.F., to bondholders, industrialized nations, China, large commercial banks. The list is even longer, and the amounts total many billions of dollars. Then Covid hit and they needed even more money for healthcare.
At this point, Kenya looked for new loans to pay back the old ones. However, because interest rates went up, borrowed money cost them as much as 10% interest. Then, making the situation even more dire, some of the lenders asked for fiscal austerity from Kenya as a condition for new loans. But that meant raising taxes and cutting subsidies. And that is when the protests started.
Kenya is not the only country with a massive sovereign debt. According to the Council on Foreign Relations (CFR) Sovereign Risk Tracker, 10 other nations are most at risk. Because of its elevated risk (of default), Kenya had that 10% interest rate:
Our Bottom Line: Sovereign Debt
When we compare debt to GDP, it is sort of like using your income to determine the size that your mortgage should be. For most of us, a million dollar mortgage would be too large when we compare it to our income. However, for a Bill Gates or Elon Musk, it would be tiny.
Similarly, we can decide if government debt is too much by comparing it to the GDP. We just need to think of the debt as what you borrow for a mortgage and the GDP, as the value of goods and services produced in a year, rather like your income.
During 2023, Kenya’s debt to GDP ratio was close to 70%:
My sources and more: Thanks to the NY Times for inspiring today’s focus on Kenya’s sovereign debt. From there, the Council on Foreign Relations Sovereign Risk Tracker. and WSJ and Reuters.
Our featured image is from the Visual Capitalist.
