Taxpayers to take over Sh59.7 billion Kenya Airways loans

A fleet of Kenya Airways planes at Jomo Kenyatta International Airport in this photo taken on July 15, 2020. PHOTO | JEFF ANGOTE | NMG

The Kenyan government will take over Kenya Airways loans amounting to $485 million (Sh59.7 billion) that it had guaranteed the carrier, as part of its rescue plan for the troubled airline.

National Treasury officials told the International Monetary Fund (IMF) that it will undertake many such take-overs of distressed loans—technically known as novation—pushing up the country’s annual debt service by Sh10 billion.

This adds to the country’s debt repayment woes which have been aggravated by a weaker shilling amidst tightening liquidity in the global financial market that makes it difficult for high-risk frontier economies like Kenya to get cheap financing.

The airline has been a perennial beneficiary of state bailout, with the carrier expected to receive another Sh35 billion in the current financial year, with some of it being used to repay its debts.

KQ, as Kenya Airways is known by its international code, defaulted on part of its $525 million (Sh64.6 billion) loan from Private Export Funding Corporation (PEFCO) of USA and guaranteed by Exim Bank of USA who in turn were guaranteed by the Government of Kenya.

The KQ loan that was called as a result of loan payment defaults was for the purchase of seven aircrafts and one engine.

Treasury says that following the default KQ sought the government’s intervention and the Cabinet gave approvals for the Government to pay the loan arrears on behalf of the airline, with the balance of the guaranteed loan being taken over by the State to prevent further call up.

“The guarantees are already part of the GoK debt stock and, not likely to cause significant impact, other than an increase in the annual payment obligations from the Consolidated Funds Services (estimated at Ksh.10 billion per year),” said the Cabinet Secretary for National Treasury Professor Njuguna Ndungu.

KQ, which has never recorded a profit since 2012, saw its financial position worsen in 2020 when global travels were restricted as governments tried to curb the spread of Covid-19 by limiting movement of people.

The loan repayment done on behalf of KQ by the State shall be recovered through a subsidiary loan agreement between Government and the airline as per the requirements of the PFM Act, 2012.

President William Ruto’s government has been shopping for a strategic investor and on a recent American trip the head of state met top executives of Delta Air Lines where he launched the government bid to sell its entire 48.9 per cent stake in Kenya Airways.

“I’m willing to sell the whole of Kenya Airways Plc,” Dr Ruto told Bloomberg News on the sidelines of the US-Africa Leaders Summit in Washington DC on Friday. “I’m not in the business of running an airline that just has a Kenyan flag, that’s not my business.”

The IMF, which had entered into a 38-month programme with Kenya to help it deal with its debt vulnerabilities, pushed for the restructuring of KQ as one of the conditions of the programme.

Priorities of the airline’s restructuring plan, the IMF noted, include network optimisation, lease negotiation, staff rationalisation, and other cost management efforts.

“The airline has retired 16 loss-making networks and renegotiated some aircraft leases but faces challenges in rationalizing staff costs,” said Treasury.

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