The Treasury deferred payments amounting to nearly Sh90 billion to this financial year after it cancelled plans to float a $1.1 billion (Sh133 billion) Eurobond last June because of high-interest costs, the International Monetary Fund has revealed.
The administration of retired President Uhuru Kenyatta reached the decision after it failed to borrow from international capital markets on higher interest demands from investors of about 12 percent, double the 6.3 percent that Kenya paid a year earlier for a similar amount in 2021.
The resultant funding gap resulted in the country not honouring payments equivalent to 0.7 percent of the gross domestic product in the last financial year.
“A constrained borrowing environment meant that planned external commercial financing did not materialise. The lack of funds contributed to 0.7 percent of GDP in unpaid obligations that were carried over to FY2022/23,” the IMF said in a statement late Tuesday.
With Kenya’s nominal GDP estimated at more than Sh12.75 trillion in June, the budgeted payments which were not made are equivalent of Sh89.26 billion.
The Treasury has said proceeds of the failed Eurobond were part of its suspended liability management operations for the financial year ended June 2022 that was aimed at “lengthening the maturity structure and reducing the refinancing risks in the debt portfolio”.
Failure to raise the targeted funds prompted the country to suspend the debt re-profiling programme which was geared at repaying the debut 10-year Eurobond which matures in the year ending June 2024. This was largely because of “the elevated yields as a result of the global monetary policy to increase rates to avert inflation rates as well as the Ukraine and Russia crisis.”
“The National Treasury initiated engagements with the holders of targeted commercial debt earmarked for re-profiling and proposed amendments to the facility agreements,” the Treasury wrote in the Annual Debt Management Report for 2021/22.
“The proposed review of terms included repeal of the punitive prepayment clauses which require prepayment fees that could arise as a result of voluntary pre-payment of any amount outstanding.”
Kenya has in the last three financial years largely tapped cheaper concessional loans, helping to slow down the accumulation of expensive short-term foreign commercial credit and loans from rich countries which largely come on semi-concessional terms.
Treasury data shows Kenya’s commercial debt portfolio, largely Eurobonds and syndicated loans, have since the onset of the pandemic dropped $685.87 million (Sh83.52 billion) through June 2022 compared with a jump of $6.33 billion (Sh770.80 billion) in a prior three-year cycle.
Under the Medium Term Debt Management Strategy, Kenya aims at continuing to “optimize the use of concessional funding sources, and lengthen the maturity profile of public debt through the issuance of medium to long-dated bonds and deepen domestic debt market to be able to finance a bigger portion of budget deficits”.
Concessional external loans from multilateral lenders such as the World Bank and African Development Bank are on average priced at a fixed interest rate of 1.75 percent, with a 35-year tenor and a grace period of up to 10 years.
President William Ruto, who took power in September, has pledged to cut down on expensive foreign borrowing, including rich countries like China.
“I am looking forward to the day, soon enough, when we borrow from the savings of the people of Kenya to run our development instead of borrowing from other countries, and that is what holds the future for us,” he said on September 11 ahead of being sworn into office.
“I am encouraging the people of Kenya as we work together to get our economy out of the mud… that each and every one of us must pay their taxes, and I am going to lead from the front, making sure I pay my taxes.”
Editors note: This article has been revised to correct an earlier version that said the deferred payment related to debt payments. IMF says the deferred payments in question were not “debt payments”. They relate to regular (non-debt) payments that were due in FY21/22 but carried over to FY22/23.