DEBT BURDEN

Restructure loans and cut commercial borrowing, Kenya told

The ratio of debt service to revenues was 42.8 per cent by end June 2019

In Summary

•The country’s debt stands at Sh6.694 trillion–Central Bank of Kenya data.

•External debt amounts to Sh3.515 trillion while domestic is Sh3.175 trillion.

Uhuru China Trip
Uhuru China Trip

The government has to find ways to reduce Kenya’s debt repayment burden by restructuring some of its debt, budget experts have advised.

It should also reduce commercial borrowing that has been more expensive and with shorter maturity periods.

The International Budget Partnership (IBP) offers the advice in a paper titled ‘The State of Kenya’s public debt: The thin line between a rock and a hard place."

This is in the wake of a growing debt as the government moves to bridge the budget deficit due to falling revenues, worsened by the Covid-19 pandemic.

 

The composition of Kenya’s debt has significantly changed through increased borrowing from external commercial sources such as Eurobonds and, more recently, from taking on syndicated loans from commercial banks.

At the same time, the share of borrowing from multilateral lenders, which is institutions that provide financial assistance through loans or grants to support economic and social development – such as the World Bank and the African Development Bank has reduced significantly.

Currently, the country’s debt stands at Sh6.694 trillion–Central Bank of Kenya data–where external debt amounts to Sh3.515 trillion while domestic is Sh3.175 trillion.

The total public debt service payments as at  June 2019 amounted to Sh640.829 million, National Treasury books indicate.

The ratio of debt service to revenues was 42.8 per cent by end June 2019 compared to 33.8 per cent by end June 2018, as a result of heavy external commercial debt maturing during 2018/19.

“The increase was largely on account of higher repayments done during the year on external syndicated debt and maturity of the 2014 debut Eurobond of USD750 million that matured in June, 2019,” the CS Ukur Yatani led ministry notes in a recent update.

The ministry had projected public debt stock in the medium-term to increase from Sh5.809 trillion in June 2019 to Sh6.254 trillion by June 2020 this year, which has been surpassed by about Sh440 billion.

 
 
 

External and domestic debt service stood at Sh368.4 billion and Sh272.3 billion, respectively, as at end of June 2019.

As a proportion of the total public debt service, external and domestic debt service was 57.5 per cent and 42.5 per cent as at end June 2019 compared to 48.9 per cent and 51.9 per cent respectively as at end June 2018.

The average maturity, grace period and average interest rate on new external loan commitments at end of June 2019, were 15 years, six years and four per cent respectively.

The country’s budget continues to experience deficits that have forced the country to continue borrowing heavily.

“Consequently, the debt repayment bill has grown rapidly, and the increasing proportion of ordinary revenue absorbed by debt has become a serious threat to other critical service provision areas,” IBP’s Abraham Rugo (country manager) and researcher John Kinuthia say in their paper.

Kenya’s biggest debt obligation is to China, which is in excess of Sh661 billion, mainly monies borrowed for infrastructure.

As at June last year, the country also owed Japan Sh135.2 billion, Germany (Sh37.3billion) , Italy (Sh36.2 billion) and Belgium (Sh11 billion).

Energy, infrastructure and ICT accounts for 65 per cent of total loans, environment protection, water and natural resources (13%) while agriculture, rural and urban development has a six per cent share.

Treasury has proposed to push its planned borrowing across the 2020/21 fiscal year by 13.1 per cent to Sh951.4 billion from Sh841.1 billion–draft 2020 Budget Review and Outlook Paper (BROP).

This is backed by last November’s Parliament move to okay public debt ceiling to increase to Sh9 trillion.

The World Bank has warned against growing debt that could render the country insolvent.

It called for fiscal consolidation to reduce debt from 62 per cent of GDP to 55 per cent in the medium-term, a move that will ensure the country does not breach the 70 per cent maximum allowed threshold.

In May this year, the International Monetary Fund raised Kenya’s risk of debt distress to high from moderate due to the impact of the coronavirus crisis.

“The risk of debt distress has moved to high from moderate due to the impact of the global Covid-19 crisis which exacerbated existing vulnerabilities,” the fund said.