EXTERNAL BORROWING

Treasury to retire expensive commercial loans - CS Yatani

The government will now focus on multilateral loans with lower interest rates to finance capital expenditures

In Summary

•Despite the increasing debt burdening taxpayers money, contracting new debt especially those on short term maturities face high refinancing risk due to changes in exchange rates.

•A large number of debt redemptions are expected this year.

Acting Treasury CS Ukur Yatani on November 15, 2018.
Acting Treasury CS Ukur Yatani on November 15, 2018.
Image: /JACK OWUOR

The National Treasury plans to retire government's commercial loans to in a move to maintain the public debt and ensure it does not soar to higher levels.

According to acting cabinet secretary Ukur Yatani, the government will now focus on multilateral loans with lower interest rates to finance capital expenditures, over the commercial loans with interest rates of between eight to nine per cent.

The short-terms are contracted even sometimes for two year period compared to Eurobonds which could be at 15-years.

 

Commercial loans are mostly the international syndicated loans market and the Export Credit Financing charged at six-month benchmark interest rate, LIBOR2 plus a margin.

The announcement to retire comes after the CS Yatani said the will set a cap on borrowing over the next financial years to 2022/23.

“Fixing our debt limit is becoming crucial as people have been questioning. We need to come with an absolute figure by fixing debt limit at a given time rather than hiding behind under the percentage of GDP,” CS Yatani said on Monday.

Currently, the law restricts borrowing to about of the country's GDP.

According to National Treasury, the commercial loans were at Sh391.81 billion as at end December 2018, composing 33.6 per cent compared to multilateral loans with 33.8 per cent.

The total debt has however surged to Sh5.81 trillion as of June this year according to Central Bank's data, out of which Sh3.02 trillion external while domestic debt was Sh2.79 trillion.

The move to absent the loans resolves to economists' advice to government to consider the cost of debt and repayment period before borrowing

 

But even so, CS Yatani did not specify on how he will retire the loans and on whether the government plans to take another long-term loans to repay the short-term as of what it s known for doing.

In May, the government borrowed about Sh210 billion in Eurobond. Part of the funds were to repay debts including the $750 million (Sh77 billion) million 2014 Eurobond that was due on June 24.

The country also used part of its debut Eurobond to retire a $600 million (Sh60 billion) syndicated loan taken in 2012.

The loan from international commercial lenders was due in August that year. The balance was to be pumped into infrastructure development.

According to the prospectus used to secure the second Eurobond worth Sh200 billion last year, the country was to spend at least 80 per cent of the proceeds on retiring syndicated loans contracted in 2015 and 2017.

The Treasury took a $1 billion (Sh100 billion) syndicated loan from a consortium of banks in March 2017, to mature in April 2019.

A large number of debt redemptions are expected this year.

Despite the increasing debt burdening taxpayers money, contracting new debt especially those on short term maturities face high refinancing risk due to changes in exchange rates.

CS Yatani has however maintained that the loans have been used to finance infrastructure projects, Big Four agenda and education.

“ We are under continuous pressure to finance projects both at national and county governments.  When such laws are implemented, citizens regard them as punitive but we need for more revenue collection,” he said.

The government is expecting to effect the income tax bill which is before parliament to fill some of the gaps in financing.

The bill will include charged tax from income accrued from digital marketplace.

This also include tax to security services, cleaning and fumigation, outside catering services and transportation of goods, sales promotion, marketing and advertising services.