Why Kenya can only sink deeper into debt

Kenya, which is reliant on tourism for 10 percent of the country’s GDP and 9 percent of the total employment, was in trouble. What is more, the leading foreign exchange earner, that generated Sh163.6 billion in earnings in 2019,  was gone as a result of the coronavirus pandemic exposing the country to twin problems relating debt — the cost of existing debt and its sustainability.

The sharply dwindling fortunes of tourism were bound to have a somewhat domino effect on the economy, especially on the intricate question of repayment of public debt that has been piling up rapidly over the recent past.

Without dollar inflows the shilling weakened, increasing Kenya’s dollar debt by Sh305.6 billion over the year as the Kenyan currency hit a new historic low of 111.3.

With gross domestic products (GDP) shrinking into near recession, the Sh7 trillion debt hit 69.2 percent of the economy in August.

“The shilling depreciation will definitely mean that we need more money to pay for our debts so the weakening of the shilling is a great concern to Treasury,” said Renaldo D’Souza head of research at Sterling Capital.

As the debt became bigger and the economy was shrinking, Kenya was suddenly thrown into the group of countries which faced difficulty paying debt.

Ecuador and Rwanda have struggled to repay their debts while Zambia has officially defaulted alongside Lebanon, while Argentina is heading for its ninth sovereign default since independence in 1816.

While the pandemic was the last straw that broke the camel’s back, Kenya’s debt crisis has been cooking since the Jublilee administration took charge.

When President Daniel Moi left office, Kenya’s public debt stood at Sh629 million at 60 percent of GDP.  President Mwai Kibaki left a decade later with a debt of Sh1.79 trillion but with an expanded economy to support it, putting the debt at 41 percent of GDP.

President Uhuru Kenyatta’s Jubilee administration has borrowed at least Sh6.1 trillion in the period it has been in power having inherited slightly more than Sh1.79 trillion in June 2013.

Read: Public debt burden to hit Sh5.6 trillion

Treasury chiefs project in a draft Budget Review and Outlook Paper,  new loans of Sh1.87 trillion in the two years to June 2022 meaning the Kenyatta’s administration will have borrowed Sh2.5 billion daily,  pushing Kenya’s debt to Sh8.06 trillion.

Analysts say so reckless was the borrowing that the administration took very expensive short-term loans available.

Kenya under the Jubilee administration has taken nine syndicated loans compared to a single one during the tenure of President Kibaki, underlining the current government’s unlimited desire for debt.

In 2019 Parliament tried to control the mounting debt by setting a Sh9 trillion debt ceiling. However, since Kenya is in a deep hole it seems the only way to stay afloat in terms of repaying it and meeting other financial obligations is to dig itself deeper into the pit. The Sh9 trillion ceiling is on the verge of being breached. 

“As at August 2020, the stock of public debt stood at Sh7.06 trillion, this together with committed undisbursed debt of Sh1.35 billion translates to a stock of public debt of Sh8.41 trillion against a ceiling of Sh9 trillion, which implies limited space for additional borrowing,” Treasury Cabinet Secretary Ukur Yatani said in the post-Covid19 recovery strategy.

The CS said Kenya could simply not meet debt payments since we need half of all our revenues to service repayments.

“Debt servicing payments for both domestic and external debt amount to Sh904.7 which is 47 percent of total government revenue,” the CS said.

Eurobonds

Due credit has to be given to the new Treasury team which inherited an almost impossible job. They have been daring and ambitious in some respects.

Since 2019 when Treasury Cabinet Secretary Henry Rotich was ousted from the docket and the first Director–General of Public Debt Management Office at the Treasury Haron Sirima was appointed, Kenya has not borrowed from bankers or the Eurobonds.

Treasury said it will also seek to push wealthy countries and multilateral lenders like the World Bank to cancel part of it ballooning public debt. It will also consider taking a Sh75 billion debt repayment break from G20 countries which will reduce debt service costs.

Kenya also made its first conversion of a treasury bill into a long-term treasury bond, a strategy called a switch bond that has helped the government delay the repayment of Sh25 billion.

The Central Bank of Kenya (CBK) said the switch bond is part of the initiatives that have helped decrease the amount of Treasury Bills by 6.9 percent to Sh907.7 billion in June 2020 from Sh975.3 billion in June 2019.

Pension funds

The team was also toying with the idea of having pension funds freeze interest payments for two years that could save the State up to Sh60 billion a year, according to the Actuarial Society of Kenya, since 40 percent of the Sh1.3 trillion pension assets are invested in government.

Kenya changed its borrowing policy in line with the 2020 medium term debt strategy, to move away from commercial loans which have become expensive, short term and risky especially due to the shilling depreciation.

Treasury says Kenya prefers loans arranged from multilateral bodies since they carry friendly terms with low rates and longer repayment periods.

Treasury has then borrowed Sh75 billion from the World Bank last year and a further Sh100 billion this year. Treasury also borrowed Sh79.3 billion from the International Monetary Fund (IMF).

Kenya has now applied for $2.3 billion (Sh250.4 billion) from the IMF and $1.5 billion (Sh150 billion) from the World Bank.