EXPERT COMMENT

Foreign debt on ghost projects burdens country

Chances of corruption can be more prominent in commercial debts

The National Treasury building
The National Treasury building
Image: FILE

When a government is acting in the interests of its people foreign debts are usually on concessional terms. This is because many institutions and organisations in developed countries and globally, actively work to promote the industrialisation of low-income countries, in order to boost global trade, build strategic alliances and in some cases, for regional dominance.

Bilateral debt is a simple arrangement between a lender and a borrower. Advantages include more negotiation power between parties, for example, in renegotiating terms. The problem arises when "deliberate inefficiencies" are crafted into a leveraged tender.

However, since these are often government to government arrangements, the chances of corruption can be more prominent in commercial debts, a type of debt where the lender is a private profit-making entity.

As at 30th September 2019, most of Kenya’s bilateral debt is on concessional terms with no interest chargeable on Sh4.2 billion and an interest rate of just 2.08 per cent on Sh660.5 billion from Exim Bank of China (which constituted 74 per cent of total bilateral debt and got the relic like railway trains chugging along).

Export credit refers to loans given by countries looking to finance buyers of their exports. 71 per cent of Kenya’s export credit is at 3.97 per cent, which is actually the highest rate in the category and charged by Italian Bank Intesa Sanpaolo, but was also pinpointed in the recent  dams scandal.

Multilateral credit is given by institutions accountable to multiple countries and carries the highest level of accountability. A majority of Kenya’s Sh1 trillion multilateral external debt is lent at less than one per cent.

The alarming portion is the commercial bank debt, which formed 34 per cent of total external debt. Most of these debts exceed seven per cent interest rate and Sh288 billion (or 29 per cent of commercial external debt) attracts an interest rate of 9.4 per cent or a simple figure of Sh27 billion a year in interest. This is more than twice what would have been chargeable on a loan of Sh600 billion at two per cent!