The International Monetary Fund (IMF) is upset over Kenya’s plans to borrow Sh193.6 billion ($1.5 billion) from the United Arab Emirates (UAE) as the country forges closer ties with the Emiratis.
The fund reckons that the UAE debt is costly and is pushing Kenya to avoid commercial loans in favour of concessional credit issued by lenders such as the IMF.
It argues that the commercial loan from the Middle East will derail Kenya's debt management plan, which seeks long-dated debt offered on concessionary terms.
The UAE facility, which is under discussions, will be repaid after seven years and comes with an 8.25 percent interest rate and a seven-year tenor, Treasury Cabinet Secretary John Mbadi said on Wednesday.
Kenya is seeking to diversify its sources of financing after deadly protests forced the government to abandon a raft of tax hikes and delayed disbursements from the IMF.
Under President William Ruto, who took power in September 2022, Kenya has forged closer ties with the UAE.
The IMF Director for Africa, Abebe Selassie, told the Business Daily that the fund’s principal concern with the UAE-backed commercial debt is the impact it will have on Kenya’s cost of funds.
“It goes back to the point I made about making sure that the weighted average cost of borrowing remains at a healthy level,” Mr Selassie said Friday on the sidelines of the ongoing World Bank and IMF Annual Meetings in Washington DC.
“If countries are borrowing at 8.0 percent, 9.0 percent or 10.05 percent for the entirety of their debt stock, you pretty soon are going to get into debt problems because that will tend to be much higher than the growth rate that the country has.”
The Kenyan government is spending roughly half of its revenue to repay debts that are falling due, official data shows, straining its finances.
It has countered the IMF position, arguing that the loan was cheaper than the other options, including Eurobonds.
Mr Mbadi says the UAE-backed debt was fairly priced when compared to Kenya’s latest Eurobond floated in February.
Kenya issued a $1.5 billion dollar-denominated bond at 10.37 percent in February to partially buy back a portion of a maturing $2 billion Eurobond.
Sources at the Treasury say the IMF is uncomfortable with Kenya looking at the Middle East for funding, adding that the fund would have expressed little reservations if the country had sought Eurobonds.
The IMF, which has loaned Kenya billions of dollars in budget and currency support in recent years, has tied the aid to a string of demands for economic and governance reforms.
The loans have offered the fund leverage in dictating public policy in a scale not witnessed over the past two decades.
The IMF argues that Kenya’s growing appetite for highly priced commercial debt could trigger debt service obligation challenges in coming years.
“It’s not so much that a single loan will be the cause of debt problems but the total average cost has to be as low as possible. So, it’s in that context that we often will flag concerns if a particular loan is going to be tilting the average cost of funding to a higher level, causing debt problems down the road,” Mr Selassie said.
“A really important reason why we keep talking about this funding squeeze and the need for increased concessional financing to support in reaching funding goals and why the IMF itself provides financing is to lower the weighted average cost of funding.”
With the Sh193.6 billion loan from the UAE, the government plans to slash the domestic borrowing target for the current financial year by 5.9 percent to Sh388.4 billion, a move it hopes will push interest rates in the domestic market further down.
The Treasury is walking a financing tightrope after deadly protests forced President William Ruto’s administration to abandon the tax measures that would have collected Sh346 billion this year.
Pursuit of cash from UAE emerges in a period Abu Dhabi is increasing its dealings with Kenya as part of its efforts to build influence on the continent through a series of bailouts extended to African countries-- including $35 billion to Egypt earlier this year.
Abu Dhabi offered Kenya a Sh2 billion gift after floods and landslides hit the country and paid for the private plane that took President Ruto to the US in May amid criticism of extravagance.
Abu Dhabi royal Tahnoon bin Zayed Al Nahyan, UAE President’s brother, has association with a firm that formed a consortium with Safaricom for the rollout of the controversial universal health coverage (UHC) programme.
The UAE's Abu Dhabi National Oil Company (ADNOC) and Emirates National Oil Company were among three Gulf firms Dr Ruto's government picked last year to supply Kenya with oil on longer credit terms, in a shift from an open tender system.
