Economy

Public debt relief helps cut Kenya payments by Sh78bn

CBK-sirima

Public Debt Management Office Director General Haron Sirima. FILE PHOTO | NMG

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Summary

  • The National Treasury estimates that deferred repayments for loan principals will amount to Sh42.23 billion in the current financial year ending June while reliefs on interest payments would hit Sh35.94 billion.
  • Haron Sirima, the director-general for public debt management at the Treasury, said a variation in the strength of the shilling also helped to boost the size of savings.

Kenya projects 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 National Treasury estimates that deferred repayments for loan principals will amount to Sh42.23 billion in the current financial year ending June while reliefs on interest payments would hit Sh35.94 billion.

Haron Sirima, the director-general for public debt management at the Treasury, said a variation in the strength of the shilling also helped to boost the size of savings.

“The variance (in debt service costs) is also due to exchange rate assumptions whereby the Treasury assumed a weaker shilling,” Dr Sirima said.

“There was also change in forecast rules or assumptions where more often delayed disbursements mean debt servicing is pushed forward.”

The shilling last year depreciated by about 7.18 percent against the US dollar — which accounts for the lion’s share of the Kenyan debt stock— to 109.17 units. The shilling has, however, appreciated 2.18 percent since the beginning of this year to exchange at 106.79 against the greenback.

Kenya was initially reluctant to apply for debt suspension offers by rich countries but had a change of heart in January after domestic revenue collection missed 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.

Tax revenue

The impact of the disease had battered the country’s tax revenue collection at a time more of its debts were falling due amid gaping fiscal deficits.

The about-turn also came when the country had breached its debt-carrying capacity with the external debt service to exports ratio hitting 23 percent in December last year, surpassing the 21 percent threshold.

Public debt-carrying capacity is the maximum amount of debt that a country can owe beyond which its income or growth can no longer increase.

With outlook reports from institutions such as the international Monetary Fund (IMF) showing Kenya was susceptible to export and market financing shocks, the country successfully applied for debt suspensions from the Paris Club of countries and China.

China, Kenya’s largest bilateral lender, accounted for 39 percent of the deferred debt which Nairobi secured in January. 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.

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

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

The latest debt service cost estimates show Kenya will save Sh6.96 billion out Sh13.90 billion which was due to Italy this year while repayments to France have been cut by Sh4.33 billion from Sh8.68 billion.