Kenya has received a $750 million (Sh85.8 billion) loan from the World Bank to support its budget and drive fiscal, power, water and land reforms even as the costs on Eurobond double.
The loan is the second tranche granted to the country after World Bank wired a similar amount in June last year under the Development Policy Operation (DPO) programme, which lends cash for budget support instead of financing specific projects.
The World Bank said the concessional loan will have a 3 percent annual interest rate with $520 million lent through the International Development Association (IDA), having a 30-year maturity with a five-year grace period and $230 million through the International Bank for Reconstruction and Development’s (IBRD) with an 18.5-year maturity and a five-year grace period.
The funds are meant to help the economy recover from the effects of the Covid-19 pandemic by strengthening fiscal management, driving efficiency in the power sector as well as achieving environmental, land, water and healthcare reforms.
This comes as yields on the bonds, which have a maturity profile of between two and 26 years, have gone up by an average of 3.34 percentage points since June 2021. The highest rise has been on the seven-year paper maturing in 2027, which has nearly doubled from 4.8 percent to 9.17 percent.
“This funding is the second in a two-part series of development policy operations initiated in 2021. The total annual interest cost of the Kenya DPO is approximately 3.0per cent,” said Alex Sienaert, senior economist for the World Bank in Kenya.
The bank said some of the funds would go towards setting up an electronic procurement system for government goods and services to improve transparency.
Mr Sienaert said by the end of 2023, the program aims to have five strategically selected ministries, departments, and agencies, procuring all goods and services through the electronic procurement platform.
In energy, Kenya is expected to ensure competitive pricing through a transparent, competitive auction-based system that has the potential to generate savings of about $1.1 billion (Sh125 billion) over ten years at current exchange rates.
The funds should also help achieve higher taxes, expenditure cuts whilst preserving space for social spending and reforms to drive revenue growth.
Already, the risk assigned to Kenya’s sovereign bonds by international investors has gone up in the last nine months even before the Fed rate announcement, meaning that the country stands to pay higher interest if it floats a new Eurobond under the current market conditions.
Kenya agreed with the IMF to stick to concessional finance to reduce debt vulnerabilities that have seen the country turn away from syndicated loans and only focus on multilateral loans and Eurobonds.
Kenya is trying to balance its debt portfolio after a surge of commercial debts piled up and became expensive to repay taking up more than 63 per cent of tax revenue.
Concessional and semi-concessional borrowing, including from the IMF and other multilaterals are part of the Treasury plan’ to limit reliance on external commercial borrowing in the coming years to reduce debt-related vulnerabilities.
By borrowing from the multilateral bodies, the IMF and the World Bank, Kenya has already managed to cut dependence on the more expensive commercial loans.
The cheaper World Bank and the International Monetary Fund (IMF) loans have reduced the average cost of Kenyan loans from 9.1 per cent to 6.9 per cent according to Parliament Budget Office.