In the 1980s, Africa together with Latin America took out big loans from euro-dollar lending banks which mostly went to buttress their military regime struggles, leading to what came to be known as the “Global South debt crisis.”
This Global South debt crisis consequently led to a “lost decade” of crisis and painful recovery during which large amounts of capital continued to be transferred out in form of debt payments and little came in for investments in industrial, infrastructural or educational development.
Unfortunately, African countries seem to have quickly forgotten this part of history. Today, many are heavily borrowing internationally only to waste the funds in projects that have little or no value for money and in some cases the funds not getting to the sovereign countries but diverted into private accounts, creating another perfect storm situation similar to the 1980’s.
According to the Jubilee Debt Campaign - a global movement campaigning against unjust debts - 28 African countries were rated to be in debt distress or at high risk of debt distress at the end of 2017, up from 22 at the end of 2016 and 15 in 2013.
The biggest red flag that the debt storm is about to come is that African government treasuries are actually preferring commercial loans from euro-dollar lending banks exposing them to high risk of external debt distress, instead of opting for concessional external financing to minimize costs and refinancing as well as foreign exchange risks.
Effective mitigation of refinancing risk has become increasingly relevant for debt managers in light of the continued turmoil in sovereign debt markets but some countries like Kenya whose debt sustainability indicators are deteriorating fast seem to have missed the memo.
Going through the prospectus of the second Eurobond issued a few days ago, it reflects a projected faster debt accumulation, more so, to pay back maturing obligations rather than development expenditure.
Of the $2.02 billion Eurobond proceeds raised in the second issue last months, $1.406 billion will most likely end up retiring old loans in the event lenders call in their money early.
It’s also still fresh in our memory that October last year, Kenya took a 10-year $750 million (Sh76 billion) loan from East and South Africa Trade Development Bank (TDB) to refinance the maturing 2015 syndicated loan.Generally, the overall picture of our debt servicing ratio is quite oblique.
In the current fiscal year 2017/2018, Kenya is estimated to spend Sh658.2 billion, which is 40.3 per cent of revenue target, on debt payment alone. The ratio becomes worse in the next financial year 2018/2019, it intends to spend Sh 1 trillion, which 50 per cent of revenue target, in debt payment obligations.
This is the exact trajectory that put Ghana - one of the African countries struggling with debt distress - in a debt tailspin derailing it away from sustained economic growth and development path.
Kenya seems to have become another deadbeat who’s addicted to debt like the growing number of its continental members. But despite its deteriorating debt indicators, Kenya’s second Eurobond was oversubscribed seven times.
This begs the question, are the private banks lending African governments really concerned about issues relating to fiscal transparency, public finance management and their expenditure controls; or is it only about the high yields that these government traded bonds are offering?
In fact, Kenya didn’t even bother to disclose its assigned credit rating by the three leading rating agencies on its recent prospectus for risk analysis. It’s time Kenya considers privatisation and deregulation as the alternative strong policy position to adopt and pursue in search for economic development.
Because when our debt distress hits the fan, the rude awakening will be that we have been holding bows and arrows against the lightning.