HIGH OBLIGATION

Kenya's interest on external debt stands at Sh2 trillion

The principal external debt is currently at Sh4.015 trillion

In Summary
  • The country  is expected t0 pay a total interest of at least Sh84.3 billion in annual interest
  • The value of commercial debt as the percentage of external debt has been reducing in the past five years
Graph showing Kenya's surging debt.
DEBT: Graph showing Kenya's surging debt.
Image: COURTESY

Kenya needs Sh6 trillion if it is to clear its external debt today, according to  country's debt status report by the Central Bank of Kenya. 

Kenya's average external debt maturity rose to 23.3 years, the second-highest level in 10 years at an average rate of 2.1 per cent.

This means that with total external debt at Sh4.015 trillion as at end of the last financial year, Kenya is expected t0 pay total interest of at least Sh84.3 billion in annual interest, translating to Sh1.96 trillion in 23.3 years.

This, pushed Kenya's total debt repayment (principal plus interest) to Sh6 trillion at the current rate of Sh110 to the dollar.

A drop or appreciation in the value of the shilling significantly affects the country's external debt repayment obligation, as most of it is denominated in foreign units. 

Debt management expert Karani Karori said that although a stretched debt repayment time is highly sustainable as it gives the government breathing space, more interest is incurred.

"Longer debt tenure is good and bad. While it offers the debtor enough breathing space, it leads to higher repayment costs. It is even worse when the local currency losses value,'' Karori said. 

The average tenure of Kenya's external debt has been increasing steadily since June 2014 from 18.1 years, hitting a high of 26.2 years last year as the National Treasury restructured the country's debt obligation. 

According to National Treasury Cabinet Secretary Ukur Yatani, his ministry is implementing more borrowing policy frameworks to secure predictability.

''We intend to restructure debt stocks by refinancing or substituting the commercial elements with concessionary ones. Review and renegotiate some loans,'' Yatani said during the launch of the budget-making process for the 2022/23 financial year.

He said the exchequer is finalising the External Loans Contracting Manual, a to tighten the noose on expensive dollar-denominated commercial loans that currently account for 60 per cent of all interests on external debt.

The value of commercial debt as the percentage of external debt has been reducing in the past five years, with CBK's data showing that it has dropped from 36 per cent in 2019, 31 per cent last year and 30 per cent as of June this year. 

"Recent efforts to increase Kenya’s concessional public debt led to a 10.1 percentage points increase in the proportion of multilateral debt from 30.2 per cent in June 2019 to 41.3 per cent in June this year," CBK said. 

The report shows that although the external debt service to revenues ratio declined from 20.8 per cent in June 2000 to 4.3 per cent in June 2013, it later started rising peaking at  21.4 percent in June 2019.

The high ratio in June 2019 is attributed to a one-off $750 million (Sh79 billion) Eurobond repayment.

Even so, it has been declining in the last two years due to an improvement in the terms on new external loans. The debt to revenue and export ratio illustrates the debtor's ability to meet obligations. 

The external debt service to exports ratio declined from 19.2 per cent in June 2000 to 3.5 per cent in 2010, then rose to a high of 31 per cent in June 2019.

The data by CBK is coming at a time when there is mounting pressure on the government to cut its high debt appetite that has pushed the country's total debt to Sh7.7 trillion.