Debt headache compounds Kenya’s worries amid fears for economy

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Ukur Yatani

The amount of debt falling due this year has dropped by Sh29 billion after reconciliations passed through the supplementary budget by the National Treasury.

The drop has revised what Kenya planned to pay this year to Sh253.2 billion, down from the Sh282.3 billion that was contained in the original budget for 2019/20.

The revision comes at a time Kenya has started talks with foreign lenders with a view of getting repayment holidays at a time the world is headed into a recession due to the Covid-19 pandemic.

President Kenyatta revealed last week that Kenya had opened talks with external lenders to suspend debt during the Covid-19 crisis.

“We’re in discussion with the largest economies in the world on the issue of suspension of debt for a period in order to allow us to spend more combating this pandemic,” the President said

Other regional and global institutions, such as the African Development Bank and the Africa Import Export Bank, have created emergency credit facilities that Kenya plans to tap into, he said.

“We will use these facilities to support producers and exporters so that they can return to full production and protect jobs and livelihoods,” Mr Kenyatta said.

A third of all the debt billions that fall due this year belong to China, through the Exim Bank of China and China Development Bank, making the Asian nation one of the key countries Kenya must engage in tackling the debt headache.

Data from the National Treasury shows that the two banks expect a total of Sh78.4 billion this year.

Out of this, Sh23 billion will go to the principal repayments owed to the Exim Bank of China. An additional Sh37.8 billion will be interest owed to it.

This amount would have been Sh10.5 billion more had China not delayed by six months disbursement of the first tranche for the Standard Gauge Railway (SGR).

The grace period

“We don’t have a debt relief. The overall decrease in principal payments of Sh10.5 billion is mainly due to pushing forward one principal payment for SGR loan which was to be paid in July 2019 but was instead paid in January 2020 because the first disbursement to SGR came late,” Treasury Principal Secretary Julius Muia told the Nation in a short message.

“The grace period was therefore moved forward by 6 months,” he added. This means that, instead of paying Sh33.5 billion to Exim Bank as principal, Kenya will pay Sh22 billion.

Sh22.3 billion owed to China Development Bank is also maturing this year. Sh17.5 billion is the principal, while Sh4.7 billion will be interest payments.

Treasury Cabinet Secretary Ukur Yatani explained the budget reduction thus: “We expected higher interest rates on domestic debt after lifting interest rate caps. This did not happen.”

Earlier maturities

This saw a saving of Sh19.9 billion, which brought the total reduction to Sh29 billion.

“On China, we had assumed earlier maturities, which wasn’t the case. The adjustment reflects actual position after reconciliation,” the CS told the Nation.

The maturity of the Eurobonds has also come at a bad time for Kenya. This will see Kenya pay a total of Sh48.9 billion in interest payments for the three Eurobonds taken between 2014 and 2019.

Treasury data shows that Sh14.5 billion will go towards servicing the debut Eurobond where Kenya took a total of Sh275 billion ($2.75billion).

Another Sh16.6 billion will go towards paying the 2018 Eurobond where Kenya borrowed Sh200 billion ($2billion). The 2019 Eurobonds will attract interest of Sh17.2 billion.

Besides the Exim Bank of China, the other significant creditor that Kenya should be talking to is the Trade Development Bank (TDB). Sh43.3 billion will mature this year.  This is Sh26.2 billion for debt redemption and Sh17 billion as interest.

Other top lenders include IDA (Sh27.3 billion), France (Sh17.5 billion), Italy (Sh8.9 billion), Japan (Sh5.7 billion) and ADB/ADF (Sh8.1 billion).

Others are Germany (Sh2.9 billion) and Spain (Sh2.2 billion).

The amounts include debt redemptions and the interests that fall due in the current financial year. The exchange rate used is Sh100 for every dollar.

Depending on the exchange rate at the time of repayments, these amounts can reduce or increase for debt denominated on foreign currency such as the Eurobond.

However, it is not the current debt for this financial year that should worry Kenya. The debt that falls due from the new financial year that starts in July is what needs urgent renegotiation given that  this is when the impact of the Covid-19 pandemic will properly hit the economy.

In the new financial year that starts on July 1, Kenya will need to pay a total of Sh630.1 billion.

In Mr Yatani’s debt repayment strategy, unveiled this year, Treasury was going to use the increase in tax collections and all the savings from ministerial budget cuts to repay the debt and deal with the ballooning pension bill.

The strategy, outlined in the 2020 Budget Policy Statement (BPS) said that the bulk of the savings would go towards the Consolidated Fund Services, specifically for debt repayment, pensions and gratuities.

Kenya’s total debt reached a new high of Sh6.3 trillion on March 20. This position has been made worse by the depreciation of the shilling, which has reached an average of Sh106.7 to the dollar, one of the lowest this month.

The debt position will get worse in coming months as the shilling weakens further, given that most of Kenya’s debt portfolio is dollar denominated.

Data from the Central Bank of Kenya (CBK) shows that, as at March 20, Kenya’s domestic debt stood at Sh3.04 trillion. A bulk of this — about Sh2 trillion — comprised of Treasury bonds.

Treasury bills excluding repos stood at Sh925 billion.

The rest of the debt was in the form of overdrafts at the CBK and other domestic debt, which includes clearing items in transit, advances from commercial banks, Pre-1997 Government Overdraft and Tax Reserve Certificates. This is according to the CBK’s weekly bulletin dated March 20.

The latest figures on the external debt are is $30.66 billion or Sh3.27 trillion with the local unit at 106.7 to the dollar. This brings the total debt portfolio for Kenya at Sh6.3 trillion.

In Summary

  • The impact of the Covid-19 pandemic is likely to be felt in July when the country will need Sh630 billion to settle debts that will fall due.

  • Kenya’s total debt reached a new high of Sh6.3 trillion on March 20.

  • This position has been made worse by the depreciation of the shilling, which has reached an average of Sh106.7 to the dollar, one of the lowest this month.

  • The debt position will get worse in coming months as the shilling weakens further, given that most of Kenya’s debt portfolio is dollar denominated.