December 25, 2024

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What would trigger an economic collapse in Kenya and how such a collapse would look like

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By Ephraim Maina

I know there are many people who wonder what can trigger an economic collapse in Kenya and how it would look like. If you just walk around, you can’t observe an economic crisis.

Things just look normal as people go about their daily hustles. You wouldn’t also know about the state of the economy through social media.

Many people can never write about their economic suffering because of fear of how they will be perceived.

Financial Crisis Economic Collapse Market Crash Stock Illustration -  Illustration of economy, chart: 76314881

I will write more on this later but let me go back to the above topic. One of the greatest threats facing the economy is this issue of public debt. By next year we will be spending over KShs 600 Billion on debt interest expense.

This is a huge figure which is not sustainable. If the next government continues with current levels of borrowing, a debt triggered economic collapse is almost certain.

A debt triggered economic collapse would start with default which would limit access to debt markets.

Secondly, the economy is quite weak and any serious external shock can trigger an economic collapse. Currently, prices of imported stuff have risen sharply.

This is exerting huge pressure on the exchange rate and forex reserves. Any situation in which we are unable to import basic stuff would spell doom. For instance, if we can’t import fuel we would all be grounded. Supermarket shelves would empty in days.

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Besides, there are so many businesses which depend on imports in the retail and manufacturing sector.

If you walk around town and look at what is being sold, most of it is imported. Imagine the levels of joblessness if we can’t import such merchandise.

This issue will be made worse by our high foreign debt which is also a drain on forex reserves. In 2024, we need to pay a huge part of the initial Eurobond.

The third thing which would trigger an economic collapse is instability in the financial sector especially the banks. This is not really a trigger but a consequence of the above issues.

If banks start collapsing or can’t meet their obligations as they fall due there would be a problem.

This could be caused by rise in Non-performing Loans as people and businesses struggle to repay loans. Banks would also find it hard to liquidate collateral. Lastly, a fiscal crisis can also trigger an economic collapse.

The economy has been relying a lot on the public sector which in turn has been relying on borrowing.

Anything that affects government’s ability to borrow will cause a fiscal crisis if there is no corresponding rise in revenues.

That will mean government failing to meet basic expenditure such as salaries. Remember government workers are some of the big borrowers in banks.

If they are not paid then banks would be in trouble. In these fragile economic times, people should be keen on economic data.

An economic collapse happens over a long time. It is not an overnight affair. We have been in this process since late 2015. Each subsequent year turns out worse than the previous one.

By the time an economic collapse is observable, it is already too late to do much.