The Treasury has said Kenya will find it challenging to sustain reliance on multilateral lenders like World Bank Group for external funding, signalling a return of costly foreign loans in the first year of the new administration.
Kenya has in the past three financial years largely tapped cheaper concessional loans, helping slow down the accumulation of expensive short-term foreign commercial credit and loans from rich countries which largely come on semi-concessional terms.
In the year ended June 2022, the country cut foreign commercial debt by the biggest rate since its first Eurobond eight years ago.
The stock of bilateral loans from rich countries like China also fell for the first time in seven years, while credit from multilateral lenders grew for the fourth year in a row.
“Multilateral debt (mostly World Bank) has been increasing while bilateral [has been] declining, reflecting increased softening of terms in the external debt portfolio in line with medium-term debt strategy,” director-general for public debt management office at the Treasury Haron Sirima said. “The challenge is sustaining this trend.”
Under the Medium Term Debt Management Strategy, Kenya aims to “optimise use of concessional funding sources, and lengthen the maturity profile of public debt through 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 the African Development Bank are on average priced at fixed interest rate of 1.75 percent, with a 35-year tenor and a grace period of up to 10 years.
Semi-concessional loans mature in about 22 years, including a grace period of seven years, and come with a fixed interest rate of about 2.3 percent.
On the other hand, external commercial loans are based on a reference rate plus a margin, making them costly because of prevailing market conditions like high inflation which has made money expensive.
In the year through June 2022, multilateral lenders wired $942.19 million (Sh113.06 billion) to Kenya, with the World Bank and the IMF accounting for nearly three-quarters, or $701.92 million (Sh84.23 billion), of that.
Treasury data further show bilateral loans dropped $618.37 million (Sh74.20 billion), while foreign commercial loans fell $984.61 million (Sh118.15 billion) in the review period.
In the year under review, the Treasury abandoned plans to float at least $1 billion (Sh120 billion) Eurobond after interest demanded by investors doubled to about 12 percent from 6.3 percent a year earlier for a similar amount.
President William Ruto, who took office last Tuesday, has pledged to cut down on expensive foreign borrowing, including from rich countries like China.
Dr Ruto has vowed to enforce policies that enhance tax compliance levels and grow national savings.
“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.
Dr Ruto shed little light on how he plans to address the burgeoning public debt. Kenya’s debt increased more than four-fold to Sh8.58 trillion under Dr Ruto’s predecessor. The surge in liabilities left the country at high risk of debt distress, according to the IMF.
The new administration faces a Sh862.5 billion hole in the Sh3.3 trillion budget for the year ending June 2023. The Treasury projects Sh280.7 billion of the deficit will be financed by foreign creditors, with domestic investors shouldering the remainder Sh581.7 billion.
Kenya turned to the multilateral institutions for concessional loans in the wake of the Covid-19 pandemic ravaging the revenues and limiting access to commercial loan markets.
The country had kept away from direct budget funding from institutions such as the IMF and the World Bank during former President Mwai Kibaki’s administration, with most of the funds coming in the form of project support.
Treasury data shows Kenya’s commercial debt portfolio, largely Eurobonds and syndicated loans since the onset of the pandemic dropped $685.87 million (Sh82.3 billion) through June 2022 compared with a jump of $6.33 billion (Sh759.6 billion) in prior three-year cycle.
Bilateral debt, on the other hand, edged up $219.97 million (Sh26.4 billion) in the three-year period between June 2020 and June 2022, a sharp slide from $4.4 billion (Sh528 billion) in three years through June 2019.
The biggest growth was witnessed in the multilateral debt portfolio, which surged nearly $7.39 billion (Sh886.8 billion) in three years through June 2022 compared with $904.35 million (Sh108.52 billion) between June 2017 and June 2019.