The current inflationary pressure will add Sh15 billion to Kenya's public debt in the next two years if it fails to ease, the International Monetary Fund (IMF) has said. 

In its public survey report on the impact of inflation on economies, the lender says when surprise inflation becomes persistent and expected over time, it adds to the debt-to-GDP ratios.

This is for countries with debt exceeding the 50 per cent mark of GDP.

“Each percentage point of unexpected ‘surprise’, increase in inflation reduces public debt by about 0.6 percentage points of GDP, with the effect lasting for several years,” IMF says.

"However, when it becomes persistent and expected over time, it stops contributing to declining debt ratios, which in turn, adds on the ratios."

Likewise, deficit-to-GDP ratios initially decline as spending fails to keep pace with the rise in the monetary value of the economy’s output. But the lender says such effects fade even quicker.

According to the lender, persistent and expected inflation two years from now after a shock, in this case, the Covid-19 shock, will push up the country’s debt-to-GDP ratio by about 0.1 per cent, an approximately of Sh15.6 billion of Kenya’s current debt.

The present value of the country’s debt as a percentage of GDP is at 60 per cent, worth Sh 9.4 trillion, the expected hit-mark as at the end of June this year.

Data by the National Treasury in December last year shows the government owed Sh4.67 trillion in external debt and Sh4.47 trillion in domestic debt, forcing it to dip into forex reserves for loan servicing in the wake of maturing foreign debts.

The government has however committed to cutting down the country’s debt, projecting a decline to about 53.1 per cent of GDP in the financial year 2025-2026.

This is under the fiscal consolidation programme policy stance outlined in the 2023 Budget Policy Statement.

Tough economic times on the back of rising inflation has been a contributor to the rising borrowing and costs of borrowing further pushing up the country's debt.

Inflation for the month of March stood at 9.2 per cent, still way above the statutory requirement of 7.5 per cent.

The inflation had eased from 9.1 per cent in December 2022 to nine per cent in January 2023, after five-year highs of 9.5 per cent in November and 9.6 per cent in October.

With further highs above the pre-covid levels, the lender reiterates that it will pose substantive pressure on the rising debt.

However, last week, CBK exhumed confidence that the high cost of living will ease in the coming months.

The survey examined Kenya, Colombia, Finland, France, Mexico and Senegal.

It also established the impact of rising inflation on households in terms of consumption and income.

Between Q2 of 2021 and 2022, the rising inflation levels in the country hit the poorest households the most, reducing their consumption by about 2.5 per cent.

Their incomes declined by about 0.5 per cent.