Rate hikes in dollar market worry CBK

Central Bank of Kenya Governor Patrick Njoroge. PHOTO | SALATON NJAU | NMG

Difficulties in accessing the dollar debt market is hurting emerging markets like Kenya and could create 'a potential accident', the Central Bank of Kenya has warned.

The warning comes after Kenya was unable to tap the Eurobond or syndicated loan market early this year due to the current high cost of borrowing, with investors at some point, demanding rates of up to 22 percent to lend to the country.

The jump has been caused by aggressive rate increases in the developed world with America approving a third consecutive 75-basis-point hike that is set to push the cost of borrowing further out of reach.

This means that Kenya will find it difficult to take up new loans to repay maturing debts and if it is forced to borrow very expensively it will have challenges servicing the credit.

“The policies that are being adopted in the advanced economies, for instance, the rapid increase in interest rates, will have implications in the financial markets. At this moment the financial markets have indeed frozen us out and it is difficult for us to maintain our relationships in the capital markets and borrowing,” CBK Governor Patrick Njoroge told international media during his current US visit.

“Things will be a bit tougher for a bit longer, and of course, there is the issue of a potential accident in the financial market.”

Kenya will spend Sh1.36 trillion for debt repayment out of Kenya Revenue Authority’s (KRA) Sh2.03 trillion collection, underlining the heavy debt burden the new government has inherited from the Jubilee administration.

The country with a wage bill of Sh950 billion will find it hard to balance servicing the debt while still running government operations.

Initially, President William Ruto said he hopes current tax collections of Sh5.5 billion per day will be enough to fund an average of Sh3.74 billion daily to repay the country’s mounting debts and still run the government, after meeting with National treasury officials failed to offer an alternative solution to the debt crisis.

The new President in his maiden United Nations address, however, appeared to be considering debt restructuring when he asked the multilateral lenders and Paris Club of rich countries to reschedule developing world debt.

“The World Bank, the IMF and other lenders must extend pandemic-related debt relief to the worst-hit countries, especially those affected by the devastating combination of conflict, climate change and Covid-19,” President Ruto said.

“The G20 must also suspend or reschedule debt repayments by middle-income countries during the pandemic recovery period.”

President Ruto's government is facing the harsh international debt market that is demanding a premium to lend to Kenya in what has seen Treasury cancel a Eurobond issue and planned syndicated loans.

The new government has inherited a Sh8.6 trillion debt.

The International Monetary Fund (IMF) has classified Kenya’s debt at high risk of default with debt service consuming 63 per cent of tax revenue while parliament was forced to move the debt ceiling Sh10 trillion as an interim measure to allow the next government to fund its budget.

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