If Kenya was a member of the Euro zone – Lessons in managing debt sustainably


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As European leaders convened in Brussels to find solutions—yet again!—to the debt crisis in the Euro zone, Kenyans are witnessing the old continent’s woes with a mix of surprise and self-satisfaction. 

If only Greece had managed its debt like Kenya, Europe would be in a much better shape today. Greece’s debt would be standing at 45 percent of GDP, less than a third of what it actually is. Recent global economic history would need to be rewritten and Europe’s sick nation would be a macroeconomic success, with the luxury of deciding how to spend its resources well, rather than scrambling to mobilize them. 

There are clearly many differences in both countries’ vulnerabilities. Unlike Greece, Kenya did not experience foreign capital inflows, followed by a global financial storm and domestic banking crisis. Also, Kenya’s currency is not pegged to another, which means that it can still use the exchange rate tool to address competitiveness impediments. 


At the same time, if one was to look for a single number which demonstrates Africa’s emergence (and Europe’s decline), debt ratios would be a case in point. 


Many African countries benefited from debt relief over the last ten years, but Kenya’s macroeconomic success is home-made. In 2003, Kenya’s debt stood at 60 percent of GDP. Then, through prudent fiscal policies—particularly strong revenue mobilization—and economic growth, it gradually brought the debt burden down to below 40 percent of GDP by 2008. Back in this comfort zone, it was able to respond to the global financial crisis, the post-election violence, and a severe drought with fiscal stimulus. The amount of debt relief Kenya received (through rescheduling in the 1990s) was trivial, compared to the “hair-cut” that Greece has been receiving.

According to the IMF, Kenya is on track to return to the 40 percent mark within the next two to three years.


Debt dynamics have also been driving global economic change over the last decade. A look at the G20 countries, which recently met at the Annual Summit in Los Cabos, tells the story well. In 2000, the debt of the richest economies (G7) amounted to 68 percent of their cumulated GDP. Back then already, emerging economies (the other 13 members of the G20) were doing better, with debt at 49 percent. Since then, the gap has widened enormously. The advanced economies’ debt increased to 110 percent, while emerging economies further reduced theirs to 36 percent.


Now even the world’s poorest countries have lower debt ratios than most European nations. If Kenya was a member of the Euro-zone, only Estonia and Luxemburg could boast lower debt-to-GDP (see figure).


Figure: If Kenya was in the Euro-zone, it would have the third lowest debt ratio

Source: Calculations based on IMF, Fiscal Monitor (April 2012)


In short, European leaders could borrow a few lessons from Africa on managing debt sustainably. First and foremost, what matters is not the absolute amount of debt, but its proportion to the overall economy. Kenya understood this and always kept its focus on growing the economy. In fact, Kenya’s total debt level (numerator) is higher than it was a decade ago, but its debt ratio is much lower because total GDP (denominator) is much larger. The opening up of the economy through economic reforms, especially in the service sectors, created a growth momentum which benefitted Kenya over the last decade


Kenya’s focus on ‘growing the cake’ remained even during the face of global and domestic shocks. As Greece’s modern tragedy shows, your economy will be doomed if you only focus on the numerator, because no country has ever escaped a debt crisis without growing the economy. In 2008, Kenya avoided this mistake, when it enacted a fiscal stimulus program, which despite many challenges, did help to support Kenya’s economy in 2009 and 2010.


Public investments in infrastructure and cash transfers to the poor, are two ways of responding to economic crisis, because these expenditures have high “multiplier effects”. For example, infrastructure projects, such as road construction and employing a lot of the poor and middle class. Poor people don’t sit on their money: they spend it mostly to buy goods and services, which are sold by other poor people. This keeps money moving through the economy, and contributes to growth.


Kenya has been praised—deservedly so—for its wise fiscal policies and sound budget management. But implementing the next budget will be a tough act. The government will need to achieve the “hat-trick” of maintaining fiscal prudence, while continuing to invest in infrastructure, and implementing the new Constitution (ensuring that county governments are well financed and equalization becomes a reality). Only a sustained focus on growing the cake and sharing it equitably, will guarantee that Kenya’s debt levels remain low.


Follow Wolfgang Fengler on Twitter@wolfgangfengler. This article has also been published by Kenya’s “Saturday NATION” in the column “Economics for Everyone” 

Marian Abenaa Oteng
July 06, 2012

Awesome Job, Kenya! Hope More Of Your Pals Would Emulate Your Trajectory! Well Done! Keep It Up!

July 04, 2012

interesting article one key thing you didn't mention is the demographics the fact that in kenya and african countries there is a larger younger population, which to me me means we should be borrowing more[and figuring out how to actually spend it] to invest in the infrastructure that this population will use in the coming years.

Bitange Ndemo
July 08, 2012

Interesting but great comparisons. In Africa we have always looked at the negative side when comparing ourselves with our northern neighbours. Kaletzky in Capitalism 4.0 offers some tips for European crisis.

We should learn from Europe before moviing towards a common currency with uncommon productivity levels. This is perhaps what has hurt Europe most. Europe should consider Britain's decision on its currency and move back to different currencies where Greece would simply have devalued its currency.

July 13, 2012

In Kenya the world bank is seeking to pull out from Kenya- Ethiopia power line. They pulled out of the Mombasa Road... It is as if they are looking for reasons to balking from disbursing funds. Typical reasons include corruption, human rights groups intervening, rouge contractors in the tenders etc.

July 10, 2012

Well...Kenya's tough fiscal policies have come at a great cost. Kenya has had interest rates reaching a high of about 30%, while the inflation reached 20% in 2011. Kenya has therefore had their burdens to contend with while Europe despite their woes has enjoyed borrowing rates of less than 2% since their crisis due to monetary policy encouraging spending within the economy.

July 12, 2012

Dear PS,

thank you very much for your valuable insights.


July 12, 2012

Dear Louis,

you are making a valid point and I have covered demography in some of my pieces, including this one:

There are two caveats to borrowing more to invest in Kenya:
First, Kenya's total expenditures are already 30% of GDP, which is very high for a developing country. The first priority seems to be on spending these resources well.
Second, given global uncertainties (and domestic vulnerabilities), it is good to rebuild the buffers which have served Kenya well in the 2008/09 global crisis.


September 13, 2012

you nailed it ! debt efficiency - knowing kenya, debt intended for investment (best kind of debt) would not be used for that purpose.
Considering that kenyan MPs are one of the highest paid - in fact the highest taking into account the nation's low GDP, it would be madness to finance such expenses with debt !
Put corruption in the equation, it's a good thing that the debt is low - but for how long ??? the apetite of ruling class is not going down any time soon!

August 10, 2012

I see your point in the article, but in order to praise Kenyan prudent macroeconomic policies it is senseless to use Euro Zone standards. Why, because situation and challenges are drastically others !!!

"If Kenya was a member of the Euro Zone" ... ... people wouldn't die from hunger and disease (remember Turkana!)
"If Kenya was a member of the Euro Zone" ... ... the risk of postelectoral violence wouldn't be there.
"If Kenya was a member of the Euro Zone" ... ... donors and NGOs wouldn't put their effort and money to educate, heal and feed your population.

Kenya is doing well in many fields. But this insistance in making comparisons with Euro Zone, now that it is in dire straits, is very unfair to Kenyan themselves.

Samson Mbugua
August 14, 2012

The article is pretty insightful. However, it neglects to take into account the efficiency of the debt. If the debt is used to service greed, non-existent projects and corruption, then it best be kept low! Indeed, I share the same sentiments as Jose above that Kenya's debt ratio is not a very effective measure of macro-economic prudence, considering that the overall socio-economic benefits are not felt.

In fact, I dare say that the high interest rates experienced in the Kenyan economy are as a result of having funding that does not really enter the monetary system. If debt is taken and corruptly acquired to purchase foreign assets as is common with bigwigs, the sad truth is that the intended multiplier effect that would eventually work on the interest rates would not exist and money would continue to be tight. This is, however, a highly theoretical approach.

October 23, 2012

Great Insight, i believe we can see some of the benefits from debt especially when it comes to infrastructure development if only we could do away with the bottlenecks of corruption.

Millicent Gitau
July 15, 2013

Very interesting Wolfgang, keep up the great work, new perspective in scrutinizing the debt issues in Kenya. to have prudent but accommodating policies with an aim to spur growth.