Why Kenya is backing fresh UN agency calls for debt service relief

Foreign Affairs PS Macharia Kamau. FILE PHOTO | NMG

Kenya has welcomed a renewed push by African ministers of finance backed by the UN Economic Commission for Africa (UNECA) for rich countries to extend debt service relief for regional countries to help their economies recover from the Covid-19 pandemic and weather the impacts of the Ukraine war.

Echoing calls by the UN agency and the African ministers, Kenya says calls for debt relief are timely and if heeded would provide a “breathing space” to help Kenya and other African countries cushion regional economies from the fallout caused by the latest Russia and Ukraine war crisis.

Debt servicing obligations are feared could crowd out other critical expenditures by African governments in response to the economic fallout from the latest crisis, according to analysts.

Resolutions by African ministers after the 54th Session of the Conference of African Ministers of Finance, Planning and Economic Development (CoM 2022) renewed calls for improved liquidity and better fiscal space for African countries as they recover from multiple global crises.

The draft resolutions approved by the Committee of Experts and seen by the Business Daily warn that despite the best national and global efforts, the effects of Covid-19, the war between Russia and Ukraine and worsening climate conditions “are widening the development financing gap in Africa and augmenting the continent’s debt vulnerabilities”.

“[The working group advocates] to extend the debt service suspension initiative by another two years and to waive away the IMF (International Monetary Fund) surcharges for two to three years.

“In terms of emergency financing too, the IMF needs to raise the access limits for countries to secure funding,” said UNECA deputy executive secretary and chief economist, Hanan Morsy in a statement.

The Treasury did not respond to the Business Daily queries on the new common call by the UN agency and the African finance ministers by press time.

The call has, however, been backed by the Foreign Affairs ministry, which echoed mounting concerns that sub-Saharan African countries find themselves facing another severe and exogenous shock with little financial room to wiggle amid debt servicing obligations.

“We would be more than happy to partake of course,” Foreign Affairs PS Macharia Kamau told the Business Daily. “Kenyans too are under strain from global trends.”

The ongoing Russia Ukraine war has prompted a surge in food and fuel prices in Kenya and other African countries that threatens the region’s economic outlook.

Analysts say this latest setback could not have come at a worse time — as growth was starting to recover and policymakers were beginning to address the social and economic legacy of the Covid-19 pandemic and other development challenges.

According to the IMF, the effects of the war will be “deeply consequential, eroding standards of living and aggravating macroeconomic imbalances”.

Echoing the concerns, the UN under-secretary-general and executive secretary of the ECA, Vera Songwe, said the UN agency will work with African governments and institutions to explore “the innovative finance options for Africa’s recovery that came up during the session”.

But Ms Songwe said in a statement that G20 nations should take fresh measures to unlock billions of dollars for Africa’s poorest and also developing countries like Kenya to help avoid lasting scars from a prolonged funding gap caused by the Covid-19 pandemic and the emerging shocks from the Ukraine-Russia war.

Two years ago, rich countries backed an extension of the G20’s Debt Service Suspension Initiative (DSSI), to help developing nations survive the Covid-19 pandemic, which saw 43 of a potential 73 eligible countries defer $5 billion in “official sector” debt payments.

According to Dr Morsy of the ECA, a combination of efforts at national, continental and global levels are needed to respond to the shocks endured by Africa in the wake of the Covid-19 pandemic as well as the war between Russia and Ukraine.

Dr Morsy noted that the continent was hit with a trifecta of shocks in food, fuel and finance.

“Even before the pandemic, Africa had huge development financing needs. In terms of infrastructure, it is estimated that the continent needed $150 to $170 billion a year. For education, we have a financing gap of $39 billion a year.

Africa also needs three to five percent of its GDP (gross domestic product) to finance climate action. These were complicated by the pandemic,” she said in a statement.

The call by the UN agency and the African ministers came even as the African Development Bank (AfDB) warned this week, that Africa risks sliding into stagflation — a cycle of slow growth and high inflation — as it battles the lingering effects of the pandemic and rising fuel and food prices caused by the Ukraine conflict.

“The deceleration in growth highlights the severity of the impact of the Russia–Ukraine conflict on Africa’s economy,” the AfDB wrote in its 2022 African Economic Outlook.

“If the conflict persists, Africa’s growth is likely to stagnate at around four percent in 2023.”

The AfDB estimates around 30 million Africans were pushed into extreme poverty and 22 million lost their jobs last year alone as a result of the pandemic.

Vulnerable populations, particularly in urban areas, will bear the brunt of rising prices, the report said, adding that economic disruptions stemming from the war could tip nearly four million more into extreme poverty this year and the next.

“In the absence of measures to cushion the impact, this could stoke social tension across the continent,” the report stated.

“But in many African countries, fiscal space remains constrained by the effects of the pandemic.”

The United Nations has already made proposals to the World Bank and the IMF regarding the mobilisation of various funds and debt relief instruments.

Kenya was initially reluctant to apply for debt suspension offers by rich countries but had a change of heart in January last year after domestic revenue collection missed the target by 12.4 percent, or Sh115.9 billion, in the half-year period to December 2020 — hurt by the economic fallout of Covid-19.

Kenya’s economy dipped by 0.3 percent in 2020, hit by the economic fallout of Covid-19, compared to five percent growth in 2019.

The pandemic hit Kenya’s revenues and limited access to commercial loan markets, forcing the country to turn to the World Bank and the IMF for direct budgetary financing.

Kenya earlier projected savings of up to Sh78.17 billion after it signed debt repayment moratoriums with several rich countries, lifting pressure on its thinned domestic revenue collection.

The Treasury estimated last year that deferred repayments for loan principals would amount to Sh42.23 billion in the previous financial year ending June 2021 while reliefs on interest payments would hit Sh35.94 billion.

China, Kenya’s largest bilateral lender, accounted for 39 percent of the deferred debt, which Nairobi secured in January last year. Chinese loans have financed the construction of rail lines, roads and other infrastructure projects in Kenya in the past decade.

The deal between Nairobi and Beijing saw Exim Bank of China suspend payment of Sh30.48 billion or 41.67 percent of the estimated Sh73.15 billion it was due to get this financial year ending June last year.

That was preceded by another deal with the Paris Club which cumulatively deferred about Sh32.9 billion in January 11 last year under the G20-led Debt Service Suspension Initiative (DSSI) framework.

Countries, which earlier accepted debt reliefs for Kenya under the DSSI framework, included France, Italy, Japan, Spain, the US, Belgium, Canada, Denmark, Germany and Republic of Korea.

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