BEYOND THE DEBT TRAP What Economics Actually Tells Us About Kenya's Escape Routes—If Anyone Is Listening

Part 3 of 3: The Institutional Reckoning | The Daily Pulse

Parts 1 and 2 of this series established the mechanics of Kenya's fiscal bind with some precision. The government is borrowing Sh4 billion a day, crowding out the private sector, spending nearly 80 cents of every tax shilling on debt service, and executing less than 9% of its housing development budget while State House overshoots its annual allocation before February. We know what is happening.

Part 3 asks the harder question: Why does it keep happening? And more specifically: what do the serious schools of economics — not the talking-point versions, but the rigorous analytical traditions — actually tell us about how Kenya gets out?

For this, we turn to two intellectual frameworks that most economic commentary skips in favour of more exciting ideological sparring. Original Institutional Economics (OIE) — the tradition of Thorstein Veblen, John R. Commons, and Wesley Mitchell — argues that economies are not rational machines but evolutionary systems shaped by culture, habit, and the rules societies build for themselves. New Institutional Economics (NIE) — the tradition of Ronald Coase, Douglass North, and Oliver Williamson — asks a more precise question: how do institutions emerge to solve coordination problems, and what happens when transaction costs and property rights are misaligned?

Both frameworks, it turns out, have a great deal to say about Kenya. None of it is entirely comfortable.

Framework One: Original Institutional Economics and the Habits of the State

Thorstein Veblen's great insight — one that remains underappreciated in mainstream policy circles — was that economic behaviour is not driven by rational calculation but by ingrained habits, cultural norms, and what he called "ceremonial" versus "instrumental" institutions. Ceremonial institutions serve status, ritual, and the preservation of existing power arrangements. Instrumental institutions serve an actual productive function.

Applied to Kenya's fiscal architecture, this distinction is clarifying to the point of being uncomfortable.

Consider the SGR. Academic analysis published in 2025 concluded that the project was driven more by political interests than developmental needs, with the Kenyatta administration bypassing oversight institutions and keeping loan terms confidential — a non-disclosure agreement that prohibited sharing contract details without Chinese consent. ResearchGate A railway from Mombasa to Naivasha that terminates in a field. A project that the contractor who built it has been operating for eight years, at a cost of Sh1 billion per month in operating expenses, separate from the construction loan repayments.

From an OIE perspective, the SGR is the canonical case study: a ceremonial institution masquerading as an instrumental one. It produces political legitimacy, legacy, and the appearance of development. What it produces in actual economic return is a more contested question, as Chatham House's Fergus Kell observed recently when he noted the SGR's "consistent failure to generate revenue despite government intervention to mandate cargo traffic."

The OIE insight goes further. Veblen argued that habits are sticky — they don't change just because circumstances change. The habit of borrowing for politically visible projects rather than economically sound ones did not begin with the SGR, and it has not ended with it. The institutional culture that kept SGR loan terms confidential, bypassed parliamentary scrutiny, and prioritized a president's legacy over project viability is the same institutional culture that currently allows State House to exhaust its full-year recurrent budget in seven months without consequential accountability.

John R. Commons added a crucial dimension to OIE: the idea that economic activity is governed by "working rules" — the actual practices and precedents that govern behaviour, which often diverge significantly from the formal rules on paper. Kenya's formal rules say the Controller of Budget must approve expenditure overruns. The working rule, as evidenced repeatedly, is that Article 223 of the Constitution can be invoked retroactively to regularize spending that was never a genuine emergency. The formal rule says 30% of county budgets must go to development. The working reality in Nairobi County is 12.2%.

OIE's methodological prescription — case studies, historical analysis, attention to the actual patterns of behaviour rather than the theoretical models — is exactly what Kenya's policy debate needs more of. Less Tokyo comparison, more honest archaeology of why the same fiscal patterns reproduce themselves across different administrations, different party formations, and different economic conditions.

Framework Two: New Institutional Economics and the Transaction Cost of Everything

Where OIE asks why institutions behave as they do, NIE asks how institutions could be designed to produce better outcomes. This is the tradition of Douglass North's insight that institutions are "the rules of the game in a society" — and that economic performance, over the long run, is determined almost entirely by whether a country's institutional rules reward productive activity or predatory extraction.

Ronald Coase's foundational contribution was the observation that markets don't function without institutions — that every transaction has costs (information costs, enforcement costs, negotiation costs) and that the role of institutions is to reduce those costs to levels where productive exchange can occur. Oliver Williamson extended this to show how organizations and contracts evolve to manage uncertainty and prevent opportunistic behaviour.

Applying NIE to Kenya's five available exit pathways produces a rigorous and occasionally sobering assessment.

Pathway 1: Liability Management — The Art of the Swap

In October 2025, Kenya completed a landmark conversion of three dollar-denominated SGR loans into Chinese yuan. The restructuring is expected to reduce annual debt-servicing costs by around Sh27.8 billion ($215 million), cutting the interest rate from over 6% to approximately 3%. Sharp Daily This is the single largest interest saving Kenya has secured through debt management in recent years, and it deserves credit as a genuine fiscal achievement.

The NIE analysis, however, complicates the celebration. From a Coasian perspective, the question is: what are the transaction costs of this arrangement, and who bears them? The SGR had accumulated arrears of Sh413.4 billion by June 2025, partly because escrow account terms required Kenya Railways Corporation to maintain a Sh25 billion minimum balance — effectively locking out loan repayments despite continued SGR operations. Business Daily. The currency conversion reduces the interest rate. It does not resolve the institutional design failure that allowed arrears to accumulate in the first place.

Douglass North would add a longer-run concern: path dependence. The yuan conversion makes Kenya more integrated into China's monetary ecosystem — it will need yuan reserves, Chinese banking relationships, and trade flows denominated in renminbi. As one Beijing-based analyst observed, African countries that pay or trade in renminbi become integrated into China's monetary ecosystem, needing RMB reserves and often hiring firms paid in RMB. Indonesia Finance Market. Whether this new institutional dependency is better or worse than dollar dependency is a genuine analytical question, not a settled one.

From an OIE perspective, the ceremonial dimension is equally visible: the yuan conversion was announced during President Ruto's state visit to Beijing, with the geopolitical optics of a China pivot layered over what is, at its core, an interest rate negotiation. The IMF has already flagged that while the conversion reduces near-term costs, it introduces new currency risk exposure if Kenya cannot generate sufficient yuan revenues.

NIE Verdict: Useful short-term relief, high path-dependency risk. Swaps buy time but do not redesign the institutional incentives that created the debt.

Pathway 2: Asset Recycling and the National Infrastructure Fund

The NIE framework is arguably most illuminating when applied to the National Infrastructure Fund. The government's model — sell state assets, ring-fence proceeds, invest in new infrastructure without new borrowing — is institutionally elegant in theory. The sale of a 15% Safaricom stake to Vodacom Group for Sh204.3 billion, and the broader privatization pipeline, are meant to capitalize the fund.

Williamson's transaction cost economics asks the decisive question: what governance structures exist to prevent opportunistic behaviour? In plain language: what stops the proceeds from being redirected to recurrent expenditure? The Controller of Budget has already flagged that the NIF could bypass parliamentary scrutiny. The IMF has warned that innovative financing schemes must not circumvent oversight institutions.

Kenya's institutional history on this question is, to use the diplomatic framing, mixed. Previous privatizations have been characterized by opacity and allegations of political patronage. The absence of an NSE listing for the Safaricom stake — which would have allowed Kenyan retail investors to participate — is precisely the kind of institutional design choice that NIE would flag as increasing transaction costs for ordinary citizens while reducing accountability.

North's framework on institutions and economic performance suggests that the NIF's success depends entirely on whether Kenya can create credible commitment mechanisms — rules that bind future governments to using proceeds for their stated purpose, enforced by oversight institutions with genuine authority. Without this, asset recycling becomes, as the OIE tradition would predict, a ceremonial act: the appearance of fiscal discipline without its substance.

NIE Verdict: Potentially transformative, institutionally fragile. The gap between the model and the implementation depends on oversight institutions that Kenya is simultaneously struggling to strengthen.

Pathway 3: Expenditure Rationalization — The Performance Budgeting Puzzle

Kenya has been implementing Performance-Based Budgeting (PBB) reforms since 2012. A 2024 academic study of their effectiveness produced findings that perfectly illustrate the NIE prediction: PBB shows significant positive effects on budget performance in the short run — one to two quarters — but no statistically significant long-run relationship exists between PBB reforms and sustained budget performance. And crucially, PBB's effectiveness is constrained by rising debt burdens and depends on complementary reforms: participatory budgeting, medium-term expenditure frameworks, and transparency mechanisms.

This is precisely what North meant when he argued that "institutions are the rules of the game" — but rules only work when enforcement mechanisms exist and when the players face real consequences for breaking them. An end-to-end e-procurement system is an excellent institutional tool. It becomes a performative one when the officials responsible for procurement face no meaningful accountability for the outcomes it was designed to prevent.

The OIE tradition adds a further layer: the problem is not that Kenyan officials lack knowledge of better procurement processes. The problem is that the existing habits, working rules, and incentive structures — what Commons called the "going concern" of institutional life — reward the current behaviours. Until those underlying patterns shift, technical fixes operate at the surface while the deeper logic continues undisturbed.

NIE Verdict: Necessary but insufficient in isolation. Technical reforms require complementary institutional changes in enforcement, accountability, and political incentives to produce durable results.

Pathway 4: The IMF Programme — Credibility by Proxy

Kenya is currently negotiating a new IMF programme following the expiration of its previous $3.6 billion arrangement in April 2025. An IMF staff mission arrived in Nairobi on February 24, 2026, for talks running through March 4, with the IMF projecting Kenya's public debt at 68.3% of GDP in 2025—well above the 55% sustainability threshold.

NIE Framing

New Institutional Economics (NIE) best explains IMF programmes as credibility-transfer mechanisms rather than mere financing tools. The IMF's reputation temporarily substitutes for weak domestic institutions, allowing governments to frame tough reforms as externally imposed—enabling politically sensitive changes via the "scapegoat mechanism."​

Controller of Budget's Caution

Controller of Budget Dr. Margaret Nyakang'o recently advised: "We should not take IMF programmes wholesale. We need to speak up," highlighting risks of front-loaded austerity hitting unprotected areas like development spending and social services while sparing entrenched recurrent costs.

Historical Risks

Kenya abandoned the ninth review of its prior programme amid 2024 protests over the Finance Bill, illustrating how externally driven changes without domestic buy-in provoke resistance, as Commons predicted for challenges to working rules.

NIE Verdict

IMF programmes offer political cover rather than fixes; intelligently negotiated conditionalities can spur reforms, but passive adoption merely postpones deeper institutional shifts.

Pathway 5: The Growth Imperative — But Whose Growth?

Kenya's path out of debt hinges on sustained economic growth, with recent IMF projections estimating 4.9% GDP growth for 2026, though this trails regional peers and remains vulnerable to fiscal pressures. Treasury statements consistently emphasize these figures to underscore expansion of the tax base as an alternative to austerity.

OIE Distinction

Old Institutional Economics (OIE), via Thorstein Veblen, separates "business" (financial transactions and monetary flows captured in GDP) from "industry" (real productive capacity like manufacturing, agriculture, and jobs). Kenya's growth often boosts the former while starving the latter, as government borrowing crowds out private credit.​

Recent Trajectory

GDP expanded 5.0% in 2024, yet private sector credit stagnated amid 17.2% non-performing loans and government absorbing over 70% of domestic financing. This disconnect erodes foundations for broad-based prosperity.

NIE Imperative

New Institutional Economics (NIE), per Douglass North, stresses that long-term performance rests on institutions enabling specialization—secure property rights, reliable contracts, and limits on state discretion—rather than policies alone. Without these, GDP gains fail to deliver jobs or credit access for Kenyans.​

NIE Verdict

True escape demands productive growth via institutional shifts that prioritize private enterprise over state dominance in credit markets.​

The Synthesis: OIE and NIE Convergence

OIE and NIE converge on a core insight: Kenya's fiscal crisis stems from institutional failures, not mere technical missteps. OIE highlights entrenched habits—like prioritizing ceremonial projects (e.g., SGR) over functional spending—persistent across administrations, resisting quick change as Veblen predicted.​

NIE reveals misaligned incentives: high transaction costs favor government borrowing over private lending, unchecked Article 223 spending, and weak commitment devices for funds like NIF, yielding extraction over production per North's framework.​

Coherent Reform Agenda

Targeted institutional shifts emerge at their intersection:

• Empower parliamentary oversight with binding enforcement, amplifying the Controller of Budget's underutilized warnings on spending patterns.​

• Reform the single obligor exemption to cap government borrowing, redirecting credit to private enterprise and easing productive sector constraints.​

• Ensure privatization (e.g., beyond Vodacom deals) via transparent, inclusive processes open to all citizens.​

• Negotiate IMF conditionalities as collaborative "working rules," leveraging Kenya's position for owned reforms.​

Uncomfortable Conclusion

The crisis reflects domestic institutional design—rules, habits, incentives—not just external shocks. 2024 protests signaled eroding legitimacy of old working rules, per OIE; NIE demands deliberate redesign with enforcement to translate rules into behavior.​

Frameworks reject doom: debt tools are necessary but insufficient without political will for constraints on state resource claims and space for private productivity. Kenya's true wealth lies in untapped entrepreneurs, unbuilt assets, and the oversight institution yet to compound national returns.​

This concludes The Great Debt Deception, a three-part series by The Daily Pulse on Kenya's fiscal crossroads.

Part 1 examined the borrowing paradox — why Kenya pays 17% when the IMF charges 3%, and how Sh4 billion a day is crowding out the private sector.

Part 2 followed the money — how consumption is eating Kenya's development budget, and what the collapse in development execution reveals about institutional priorities.

Part 3 asked what economics actually tells us about the way out — and found that the answer has always been less about policy than about institutions.

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About the Author

Dr. Julius Kirimi Sindi is a global expert in research funding, policy impact, and donor relations. With extensive experience in analyzing philanthropy, business, and science funding, Dr. Sindi fosters sustainable and inclusive research ecosystems. He has facilitated international business relationships across Africa, Europe, and Asia. His upcoming book, "The Blueprint of Life Well Lived," explores successful strategies for navigating complex business environments while achieving sustainable growth. He is the author of an upcoming book "How Societies Change and Why Most Reforms Fail," which introduces an African Theory of Scaling rooted in emotional truth, political safety, and system coherence. I hope to publish "CHANGING THE BATTERIES - How to Renew Purpose, Growth, and Connection When Your Light Grows Dim" as soon as possible. He is also the creator of The Daily Pulse, a widely read LinkedIn newsletter offering sharp, human-centered analysis of policy, politics, and development.