Treasury mulls concessional loans ahead of Eurobond issue

The Treasury will actively seek concessional loans from multilateral lenders before chasing another Eurobond issue to bridge its budget deficit, Cabinet secretary Henry Rotich has said.

Speaking Tuesday at the launch of the latest IMF regional economic outlook, Mr Rotich remained non-committal on when the country would take up another Eurobond saying the government will only do so at an appropriate time.

The concessional loans from multilateral lenders such as the World Bank and the African Development Bank (AfDB) are cheaper than syndicated loans and the Eurobond and would ease the pressure on Kenya’s already steep debt repayment bill.

“We will continue to follow concessional borrowing, especially from multilateral agencies like the World Bank and AfDB, which offer loans at almost zero rates.

“These are the ones we will first target before we think of issuing a syndicated loan or Eurobond. They are longer term and cheaper, both for infrastructure and social programmes such as health and education,” said Mr Rotich.

“However if we have investments that have revenue streams we can still access the Eurobond for that purpose.”

Kenya opened the current fiscal year with a budget deficit of Sh689 billion, to be financed through external borrowing of Sh503 billion and domestic borrowing of Sh241 billion.

The budgeted amount for servicing public debt was stated as Sh466.5 billion, which would be equivalent to 35 per cent of the targeted revenue of Sh1.33 trillion.

READ: Treasury spent eight times more on debt payments than roads

So far, the government has leaned heavily on the domestic market for debt financing, raising fears that it will crowd out the private sector from the credit market.

This has also coincided with the enactment of a law capping interest rates on bank loans, which has made banks inclined to lend to the government on risk-free basis instead of the private sector. 

Kenya’s maiden Eurobond issue in 2014 carried a coupon rate of 6.875 per cent for the 10-year offer, which is now attracting a yield of 7.2 per cent.

The government seems averse to borrowing again extensively at the current rate, especially on a dollar loan.

IMF director for the African department Abebe Selassie warned African governments against opting for a Eurobond type of loan as the first option to finance deficits on the basis of cost.

“It is an expensive type of loan…and should be the last recourse to finance budget deficits,” said Mr Selassie.

Renaissance Capital sub-Saharan Africa economist Yvonne Mhango last month said while infrastructure-financing gap affecting Kenya and other African countries means that another foray into external markets for financing is necessary, the accumulation should be limited to avoid debt distress.

Ms Mhango said Kenya should limit its next Eurobond issue at below $1 billion (Sh100 billion) to keep debt sustainable.