In the wake of the Coronavirus pandemic, the economic effects of the virus continue to increase with the number of cases rising and the number of deaths escalating. As such, there are risks abound on revenue collection and increased expenditure resulting from capital required to control the pandemic leading to increased fiscal pressure given the existing huge fiscal deficit. Therefore, we look at debt relief as an option available to the government in mitigating the effects of the pandemic on debt sustainability.
One of the key elements of debt sustainability in any economy is the ability to service debt, and this is usually measured by revenue collection to total outstanding payments required, both in principal and interest payments. The pandemic has so far had a negative impact on revenue collection and borrowing costs and the situation is expected to worsen as highlighted below:
The public debt in the country is a point of concern with the debt to GDP ratio estimated at 62.0% exceeding the IMF’s recommended threshold of 50.0%, as well as the debt service to revenue ratio at 46.1% having exceeded the 30.0% threshold. The trend is worrisome as the economy is likely to face fiscal challenges arising from the global pandemic. This has been echoed by various authoritative bodies, with indications currently pointing to a possible further downgrading of Kenya’s creditworthiness currently at ‘B+’ by the global rating firm Fitch. In comparison to the size of the stimulus packages for developed countries, the total amount received from debt relief is minuscule. However, it could provide an important fiscal breathing space and to offset to a certain degree the loss incurred by contracting export revenue and decline in other financial inflows. Factoring the current debt levels and the risks abound in the medium term, we are of the view that in light of the ongoing pandemic and global recession looming, for the government to reduce our debt levels, in line with the IMF sustainable levels, it should consider;
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