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IMF retains Kenya's debt risk profile at 'moderate'

According to the global lender, local currency issuances are generally associated with financial deepening which in turn is associated with higher growth.

In Summary
  • In 2018, the IMF raised Kenya’s debt risk to moderate, citing the country’s increasing refinancing risks and tighter safety margins.
  • Kenya was forced to rethink its borrowing strategy following persistent pressure from locals and international institutions.
CAUTION: IMF wants local banks to tread carefully in regional expansion.
CAUTION: IMF wants local banks to tread carefully in regional expansion.

The International Monetary Fund (IMF) has maintained Kenya’s debt risk at moderate, citing the country’s improving debt management plan that is focusing on cheaper and long tenor local loans.

In the recent policy paper dubbed ‘The evolution of public debt vulnerabilities in lower-income economies’, IMF says Kenya’s focus on sustainable local debt is a step in the right direction to easing repayment pressures.

The debt vulnerability index is however weakened by past ambitious investment plans mainly financed by non-concessional loans.

According to the global lender, local currency issuances are generally associated with financial deepening which in turn is associated with higher growth.

Furthermore, it can reduce exchange rate risk and currency and maturity mismatches, improve capacity to respond to shocks and diversify the domestic investor base

‘’The local currency debt to GDP ratios low-income economies like Ghana and Kenya have been increasing at broadly the same pace as the foreign currency debt to GDP ratio, with the share of local currency debt to total public debt at around 30 per cent over the last decade,’’ IMF said in the policy paper.

It added that higher nonresident participation creates greater demand for local debt securities, boosts market liquidity, improves price discovery and reduces long-term government bonds.

It, however, warns that this can also increase the transmission of global shocks raise external funding risks and exchange rate and yield volatility.

Kenya was forced to rethink its borrowing strategy following persistent pressure from locals and international institutions.

In the past five years, the country went on an external borrowing binge to fund infrastructure projects especially the Standard Gauge Railway (SGR) that saw its public debt rise to almost Sh6 trillion by August last year.

This pushed the share of debt-to-gross domestic product (GDP) in nominal terms, to 63 per cent, assuming a GDP of Sh9.5 trillion.

In 2018, the IMF raised Kenya’s debt risk to moderate, citing the country’s increasing refinancing risks and tighter safety margins.

The Bretton-Woods institution urged Nairobi to opt for concessional loans to refinance its debt as opposed to commercial credit, which would allow it to stretch maturities.

In the pursuit of reducing vulnerabilities to risks of public debt, the National Treasury in November last year formulated a Debt Policy that which instance saw the formation of two bodies to oversee international and local borrowing.

Treasury is also finalising on the External Loans Contracting Manual, perhaps to tighten nose on expensive dollar-denominated commercial loans that currently account for 60 per cent all interests to be paid on the external debt valued at Sh3.1 trillion.

To support local borrowing, President Uhuru Kenyatta in his recent public address revealed the government’s plan to float an infrastructure bond of Sh150 billion, with the funds raised going to the completion of all ongoing road and infrastructure projects.