Short term loans are debt traps, says IMF

The National Treasury. /Enos Teche
The National Treasury. /Enos Teche

Kenya’s average loan grace period has dropped from 10 years to an average of four years, exposing the country to a vicious debt cycle.

This was revealed at the seventh annual Africa Fiscal Forum bringing together exchequer representatives from the continent and international financial partners led by IMF.

Vitor Gaspar, director fiscal affairs at IMF, said Kenya must consider long term debt instruments to effectively space repayments.

“Although short term debts attract lower interest rates, they mature fast, forcing economies to either borrow elsewhere to repay or negotiate for postponements. Countries in Africa should consider reviewing debt management plans,” Gaspar said.

Addressing the Parliamentary Committee, IMF representative to Kenya Jan Mikkelsen asked Kenya to consider long term domestic borrowing as opposed to expensive external debt instruments denominated in foreign currencies.

“The risk with such a huge dollar-denominated debt is that a slight weakening of the local currency is sufficient to increase size of the debt, making it difficult for the country to meet its obligations,” Mikkelsen said.

Kenya’s total debt has been growing at a faster rate in the past six years, moving from Sh1.63 trillion in June 2012 to current Sh5.1 trillion, this according to CBK data.

The international lender asked Kenya and her peers in Sub-Sahara Africa to improve revenue collection mechanisms and effectively limit borrowing.

The region has some of lowest tax to GDP ratios in the world. Governments must intensify their revenue collection mechanisms to avoid submerging into debt cycles.

The two day conference is coming at the time Kenya is raising against time to meet nearing debt obligations.

The first external debt to mature this year will be the $800 million syndicated loan that Kenya obtained from four international commercial lenders including Standard Chartered, Standard Bank, Citi and Rand Merchant Bank in March 2017.

The facility which had a two year maturity will expire next month, attracting up to eight per cent interest per year. The country will also start repaying $2.8 billion (Sh280 billion) debut Eurobond that it issued issued in June 2014 to retire a $600 million (Sh61.2 billion) syndicated loan taken in 2012.

A total of $2 billion (Sh202 billion) was borrowed from international investors in June 2014 comprising a five-year issue of $500 million (Sh50.50 billion) at an interest of 5.875 per cent and $1.5 billion (Sh151.50 billion) for 6.875 per cent to be repaid in 10 years.

The first trench of this loan is set to mature in July.

In October last year, Bloomberg reported that the country was considering going for the third Eurond of $2.8 billion to offset maturing loans. Treasury CS Henry Rotich said Kenya is yet to consider any sovereign bond.

“We are yet to announce any Eurobond offer. We are still engaging our partners before deciding the amount. We will make it know when that time comes,” Rotich said.

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