The government is planning to borrow another Sh250 billion from the international market to help seal the budget deficit despite experts warning about the country’s high debt.
Treasury PS Kamau Thugge told Bloomberg news service yesterday that the country will issue $2.5 billion (Sh250 billion) Eurobond and raise another $370 million (Sh37 billion) in syndicated loans to help cover the budget shortfall of Sh622 billion.
The government expects to raise Sh46 billion from grants with the remaining balance of Sh576 billion being raised through both external and domestic borrowing — including the Eurobond and syndicated loans.
News of a third Eurobond issue comes just eight months after the government raised Sh202 billion via a sovereign bond which was largely used to retire a syndicated loan of Sh101 billion from a consortium of banks last year.
The bond was issued in February in two equal tranches of 10 and 30 years for an annual interest rate of 7.25 per cent and 8.25 per cent respectively. They are expected to mature in 2028 and 2048.
In 2014, Kenya floated the first Eurobond of Sh280 billion in two tranches of five and 10 years. It is expected to pay the first tranche of Sh97.71 billion
before end of June next year.
Details of how proceeds of the first controversial Eurobond were used remain scanty. While Treasury said that amount was used to finance infrastructural projects in the country, former Prime Minister Raila Odinga insisted the money was squandered by corrupt public officers.
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LOW REVENUE TARGETS
The government last week slashed revenue collection targets for financial years up to 2021/2022 but raised the debt portfolio for the period.
For instance, it cut
this year’s revenue projection by Sh96 billion (from Sh1.949 trillion to Sh1.853 trillion) but raised public debt margin from Sh4.82 trillion to Sh5.09 trillion.
It also revised revenue targets for 2019/2020 downward by Sh42 billion to Sh2.074 trillion while that of 2020/2021 was slashed by Sh42 billion to Sh2.38 trillion. It is targeting to raise Sh2.73 trillion in revenues in 2021/222.
Public debt on the other hand is expected to grow from the projected Sh5.097 trillion this year to Sh5.977 trillion by the end of President Uhuru Kenyatta’s term.
The National Treasury attributed the downward revision in revenue targets to amendments to revenue raising measures in the recently enacted Finance Act 2018, which resulted in the reduction of projected revenues by Sh48.6 billion.
"To remedy these deviations, revenue projections for 2018/19 have been revised taking into account a revenue shortfall of Sh172.4 billion last year, lower revenue in the first two months of the current financial year, and amendments to the Finance Bill," the Treasury said.
Kenya Revenue Authority will now have to collect Sh1.673 trillion down from a target of Sh1.768 trillion assigned during the national budget reading for 2018/19 in June.
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HIGH DEBT CONCERN
Last week, the International Monetary Fund (IMF) joined other experts to condemn Kenya’s growing debt appetite. It downgraded its loan default status from low to moderate.
IMF also forecast Kenya’s total public debt to hit 63.2 per cent of Gross Domestic Product this year from 58 percent in 2017 and urged the state to refinance loans at longer maturities to limit refinancing risks.
“The higher level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly one fifth of revenue, placing Kenya in the top quartile among its peers,” the IMF said in a report released a week ago.
IMF’s verdict on Kenya’s default status corroborated a recent study by the World Bank which ranked Kenya among 14 sub-Saharan countries that will struggle to pay their loans post-2021.
Last month, Standards and Poor’s rated Kenya’s fiscal and debt burden as weak, exposing the country’s poor credit profile to external lenders.
Although the global rating agency affirmed Kenya’s long and short-term currency sovereign credit ratings at B+/B, indicating a stable outlook, it gave the country’s debt burden a score of five on a scale of one (strongest) to six (weakest).
The government is expected to spend Sh870 billion to repay debts this financial year, which translates to 52 per cent of the revised revenue target for KRA.
The Eurobond’s plan could aggravate the negative sentiment on the shilling, coming on the heels of the unfavorable Article IV consultation report by the IMF, which raised concerns about Kenya’s risk of external debt distress,” Faith Atiti, an economist Commercial Bank of Africa told Bloomberg yesterday.
She added that a new Eurobond sale against a backdrop of external debt concerns and rising interest rates in the international debt markets could worsen debt sustainability concerns feeding the recent pressure on the shilling.
Last month, S&P threatened to lower Kenya’s credit ratings if the country’s external position weakens more than expected due to higher current account deficits, and consequently a faster increase in external debt.
Low credit rating by global rating agencies and international lenders like S&P, IMF and World Bank means that investors will be hesitant to purchase Kenya’s Eurobond and those who take the gamble will demand high interests.
High interests charged by investors on the expected Eurobond means that taxpayers will have to dig dipper into their pockets to repay public debt.
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In September, President Uhuru Kenyatta signed into law the Finance Bill, 2018, that added the tax burden on Kenyans ostensibly to raise funds for the Big Four agenda projects, and service maturing loans.
The Act introduced eight per cent Value Added Tax on petroleum products, 1.5 per cent levy for the National Housing Development Fund and kerosene adulteration tax.
It also imposed Sh20 per kilogramme of sugar confectionery, including white chocolate, increased excise tax on cash transfer from 12 per cent to 20 per cent, and that of calls and data from 10 to 15 per cent.
The additional tax obligation saw September inflation reach an 11-month high of 5.7 per cent, indicating tougher times for mwnanchi as prices of basic products skyrocket.