Debt burden holding back poor nations – World Bank

Debt payments are putting the biggest squeeze on poor countries' growth prospects for more than two decades now, according to the, the World Bank.

In its latest International Debt Report for 2022, it notes that this has dimmed their chances of recovering from economic shocks, reducing poverty and confronting climate change.

"This amid the slow global growth that was witnessed in 2022 on the back of synchronous episodes of monetary and fiscal policy tightening the world has seen in 50 years," the lender says.

Nonetheless, with the risk of an impending global recession projected this year, currency depreciation have even made matters worse for many developing countries whose debt is denominated in US dollars.

Kenya has been grappling with debt repayments which so far is projected to hit the Sh9.413 trillion mark as at end June this year, implying a borrowing space of Sh587 billion in the FY 2023/24.

According to the National Treasury, as at December last year, 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.

It still stares at Eurobond maturing and SGR debt maturity where it is looking to repay an estimated $506.7 million (Sh63 billion).

The country’s forex reserves dipped to 3.67 months of import cover last week, an equivalent of $6,566 million (Sh852.26 billion).

This below the statutory threshold of at least four months of import cover, a situation likely to trigger a tremor in the country’s buffers and pose more pressure on the dwindling shilling.

This would see the cost of imports rising, with the pressure passed to the consumers through hiked commodity prices.

The inequality gap would further be widened as more households will be forced to go hungry on high cost of living, driving up poverty levels.

Capital Markets Authority has hinted that the continued free fall of the shilling against the dollar could put the country at a risk of investor flights.

Over the past decade according to the lender, the composition of debt owed by International Development Association (IDA) countries, inclusive of Kenya has changed significantly.

IDA is the part of the World Bank that helps the world's poorest countries.

The share of external debt owed to private creditors has also increased sharply.

At the end of 2021, low- and middle-income economies owed 61 per cent of their public and publicly guaranteed debt to private creditors, an increase of about 15 per cent from 2010.

IDA-eligible countries owed 21 per cent of their external debt to private creditors by the end of last year, a 16 per cent increase from 2010.

The share of debt owed to government creditors that don’t belong to the Paris Club (such as China, India, Saudi Arabia, United Arab Emirates, and others) has also soared.

At the end of 2021, China was the largest bilateral lender to IDA countries, accounting for 49 per cent of their bilateral debt stock up from 18 per cent in 2010.

“These developments have made it much harder for countries facing debt distress to quickly restructure their debt as the rising debt vulnerabilities underscore the urgent need to improve debt transparency and provide more complete debt information," WB says.