Kenya’s debt levels have risen from 17 per cent of GDP in 2003 to 70 per cent, surpassing the IMF’s recommended threshold of 50 per cent for developing nations.
In the past two weeks, we have explored two of the three pivotal challenges facing economic development in Kenya: Corruption and the regulatory environment. Today, we turn our attention to what many consider the glue that binds the economy together – finance.
It would be no exaggeration to say that one of the most pressing challenges highlighted by the entrepreneurs we’ve spoken to in the last few months is the cost of borrowing. They all expressed how often it stands as a barrier to expansion in Kenya.
When borrowing is affordable and straightforward, it opens doors for companies to invest in equipment, enhance technology, and expand their workforce. This investment fuels business growth, boosts production, improves products, and creates job opportunities.
However, when borrowing is expensive or difficult to access, businesses hesitate to expand or innovate, stifling growth. If entrepreneurs take expensive loans, they are forced to ensure high productivity by raising profit margins (making products expensive) or cutting costs, including salaries and investments, leading to job losses.
Is Kenya’s cost of borrowing high for no fault of our own? While some “high risk” designations for developing countries may be unsubstantiated, legitimate macroeconomic factors lead to “high risk” ratings.
Fiscal reform
In 2024, Kenya made international headlines with the downgrade of its creditworthiness to B-, signalling the need for fiscal reform. This downgrade raised alarms among global investors about Kenya’s economic stability, leading to higher interest rates and urging the country to innovate and strengthen its macroeconomic environment.
A supportive ecosystem for business is crucial for economic growth and must be prioritised by the government.
A key indicator of a healthy economy is sound debt management. Kenya’s debt levels have risen from 17 per cent of GDP in 2003 to 70 per cent, surpassing the IMF’s recommended threshold of 50 per cent for developing nations.
This reflects challenges in our macroeconomic fundamentals and presents an opportunity for transformation. With a debt burden higher than the Sub-Saharan African average of 43 per cent, Kenya must restructure its debt, cut unnecessary spending, and expand its economy to achieve debt sustainability.
The pie
Think of the economy as a pie. When the pie is small, everything we do to share it among more people is problematic. We must expand the pie. To achieve our dream of shared prosperity we must diversify our economy, expand income streams, enhancing exports and attract foreign investments.
In pursuing green industrialization, we must consider where the money to invest will come from. Research by FSD Africa and Shortlist predicts 3.3 million jobs could be generated in African economies by 2030 through green industrialisation.
Entrepreneurs like Cecilia, who owns a bamboo manufacturing business, need substantial investment to grow. Many entrepreneurs hesitate due to a lack of affordable capital.
With high interest rates, banks prefer to lend to governments, stifling finance flow to the private sector and SMEs. This limits opportunities for entrepreneurs like Cecilia.
Macroeconomic environment
Even as we invest in the macroeconomic environment, green industry development must also rely on domestic initiatives. Global funds like the Global Environmental Facility (GEF) and the Green Climate Fund (GCF) can help, but Kenya and other African countries should not solely depend on expensive external financing.
In 2023, at the inaugural Africa Climate Summit, Kenya signed green manufacturing agreements worth $4.48 billion, marking a significant milestone. Countries like Rwanda have set up specialized funding vehicles such as FONERWA, the Rwanda Green Fund. There is still much more to be done.
As we move forward, let us champion a vision where finance flows fairly to those who dare to innovate. By nurturing entrepreneurship, we can unleash creativity that drives economic prosperity and environmental stewardship.
There is a generation of leaders and entrepreneurs who are innovative, love their country, and are committed to making a difference, here at home. Now is the time for investors and policymakers to create an environment where innovation flourishes and leads to a prosperous Kenya. The ultimate responsibility rests with the Government of Kenya, which must reduce debt, cut unnecessary spending, fight corruption, and spend prudently.
Wanjira Mathai is the MD for Africa & Global Partnerships at the World Resources Institute and Chair of the Wangari Maathai Foundation.
