UNCTAD urges reforms on global debt architecture amid distress

Kenya's Treasury expects interest payments in current financial year to hit Sh918 bn.

In Summary

•The UN trade and development body outlines a set of recommendations to realign the global debt architecture with developing countries’ need.

•Last year Kenya was forced to part with half of its revenue collection to offset debt. 

Austrian Ambassador in Nairobi Dr Christian Fellner and Treasury CS Prof Njuguna Ndung'u sign the Euros 40 million loan agreement on August 3, 2023. Looking on is Austria Commercial Counsellor Edith Predorf
Austrian Ambassador in Nairobi Dr Christian Fellner and Treasury CS Prof Njuguna Ndung'u sign the Euros 40 million loan agreement on August 3, 2023. Looking on is Austria Commercial Counsellor Edith Predorf

The United Nations Conference on Trade and Development (UNCTAD) has called for urgent reforms to the global debt architecture to avert a widespread debt crisis among developing countries.

This, as poor countries, including Kenya, struggle with high debt repayment amid continued borrowing to bridge budget deficits.

In the wake of the Covid-19 pandemic, developing countries’ external sovereign debt – funds borrowed in foreign currency – increased by 15.7 per cent to $11.4 trillion by the end of 2022.

The mounting debt levels are further complicated by the diversity of lenders and financial instruments.

Equally alarming is the surge in debt servicing costs. Low-income and lower-middle-income countries – also referred to as frontier markets – that borrowed when interest rates were low and investors keen are now spending around 23 per cent and 13 per cent of their export revenues, respectively, to repay their external debt.

Kenya’s debt stood at Sh10.6 trillion as of September last year, Central Bank of Kenya data shows, with recent disbursements mainly from the World Bank and the IMF pushing the debt stock past the 11 trillion mark this year.

External debt is above Sh5.7 trillion with more than Sh4.9 trillion borrowed from the domestic market.

Disclosures by the National Treasury show that Kenya’s debt repayment reached Sh600.73 billion in the period to December 2023.

The country is also mulling repayment of its debut $2 billion (Sh319 billion) Eurobond, with the weak shilling against the US dollar pushing up the country’s debt.

National Treasury expects interest payments in the financial year ending June 2024 to rise sharply to about Sh918. 9 billion. 

According to credit rating agency – Fitch Ratings, the wider-than-budgeted deficit for financial year 2024 has been driven largely by increased debt service, which the government now expects to reach about 5.7 per cent of GDP, compared with the original budget’s projection of 4.8 per cent.

“This has been partially offset by a reduction in capital investment under the development budget,” Fitch noted in its recent report.

Latest finding by an economic think tank, the Institute of Public Finance, shows that since 2014, persistent high fiscal deficits have resulted in a swift escalation of public debt, now standing at 70 per cent of the GDP.

Last year Kenya was forced to part with half of its revenue collection to offset debt. 

This meant that despite a rise in revenue collection, Kenyans had little to smile about as debt gobbled up 57 per cent of the Sh1.05 trillion tax revenues.

IPF in a new report titled Macro Fiscal Analytical Snapshot Report, says that the recent depreciation of the Kenyan shilling against the US dollar signifies a downgrade in the country's economic outlook.

IPF CEO James Muraguri, notes that the elevated risk of debt distress as highlighted by the IMF poses challenges in effectively managing external debt servicing.

Warning that for Kenya to maintain robust economic growth, it must put in place the necessary fiscal levers to promote faster private-sector-driven growth.

“Revenue optimism has been a persistent problem in Kenya for several years which in the past has tended to result in higher-than-planned fiscal deficits financed by additional borrowing," Muraguri said. 

This reflects UNCTAD’s sentiments where it has noted that the rising debt costs are draining vital public resources needed for development.

About 3.3 billion people-almost half of humanity – now live in countries that spend more money paying interest on their debts than on education or health, it said.

The UN’s “A World of Debt Dashboard” provides data and in-depth insight on key public debt and development spending indicators for 188 countries.

“This situation is clearly unsustainable,” says Anastasia Nesvetailova, head of UNCTAD’s macroeconomic and development policies branch.

“While a systemic debt crisis, in which a growing number of developing countries move from distress to default, looms on the horizon, a development crisis is already underway,” she added.

Nesvetailova underscores that the mounting debt crisis stems not only from the wave of debt after the Global Financial Crisis of 2008, the cascading crises since the pandemic and the aggressive monetary tightening in developed countries.

She points out that the main roots lie in the structural flaws of the global sovereign debt architecture, “which offers inadequate and delayed support to countries in debt distress.”

UNCTAD’s latest Trade and Development Report unpacks the current inequalities, inflexibilities and problems of the global sovereign debt architecture, outlining a strategy to address them.

“A development-centred approach to debt is needed,” Nesvetailova said, highlighting overlooked factors contributing to unsustainable sovereign debt, such as climate change.

The report advocates for a thorough re-evaluation of these factors, which encompass demographics, public health, global economic shifts, rising interest rates, geopolitical realignments, political instability, as well as the implications of sovereign debt on industrial policies in debtor states.

It proposes a five-stage life cycle for sovereign debt as a conceptual framework to analyse and improve the global debt architecture.

The stages include incurring debt, issuing debt instruments, such as bonds and loans, managing debt, tracking debt sustainability and, if necessary, restructuring or renegotiating the terms of debt.

“We are urging new creative thinking in all stages of the debt cycle, as well as new approaches to bridge the persistent divide between statutory and contractual solutions,” UNCTAD’s head of debt and development finance branch, Penelope Hawkins, said.

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