Economy

World Bank backs new push for loan restructuring amid Eurobond freeze

World bank

Signage of the World Bank. PHOTO | POOL

The World Bank has backed a push for countries like Kenya, which have been unable to borrow from international loan markets due to high-interest rates, to restructure their debts.

The Bank has said in the 'Africa Pulse' report that developing country debt could escalate to a crisis if governments are unable to borrow commercial loans to service loans as they fall due.

Kenya has been unwilling to tap dollar debts since interest rates paid for Eurobonds doubled to 12 percent from last year’s issuance of six percent.

The World Bank has backed calls from African heads of State, including President William Ruto who in his maiden United Nations address , asked multilateral lenders and Paris Club of rich countries to reschedule developing world debt.

“The current resolution mechanisms are proving to be inadequate for effectively addressing a potential debt crisis, and additional instruments may need to be set in motion. If they are not addressed, debt dynamics could escalate into a full-blown crisis, setting countries even further back. Support for international debt restructuring might be required,” the World Bank said.

World Bank warning echoes what Central Bank of Kenya (CBK) Governor Patrick Njoroge told Bloomberg News that the financial markets have frozen Kenya out, making it difficult to maintain relationships in the capital markets and borrowing.

Kenya has been unable to tap the Eurobond or syndicated loan market early this year due to high cost of borrowing, with investors 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 rise that is set to push 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 central banker warned that lack of access to the dollar debt market is hurting emerging markets like Kenya and could create a potential accident. World Bank said debt restructuring under the Paris club of rich countries in 2021 has been dwarfed by the proportion of debt that needs to be renegotiated.

The Bank said the number of countries in or at high risk of debt distress have risen to 14 in July, while eight countries continue to be in debt distress.

Kenya was handed a Sh32.9 billion loan repayment break by the Paris Club of international creditors from January to the end of June 2021.

The private sector, including holders of Eurobonds and syndicated loans, refused to participate in the restructuring.

In the current financial year, Kenya had planned to borrow Sh280 billion from the international market towards financing the Sh845 billion hole in the budget.

The new administration has, however, pledged to cut the budget by Sh300 billion, signalling the difficulty in accessing foreign loans.

The National Treasury cancelled issuance of a Eurobond and syndicated loan early this year due to the high cost of borrowing that saw the government heavily lean on local financing, pushing up domestic borrowing to Sh4.1 trillion.

The Kenya Kwanza administration debt strategy has been unclear with President Ruto saying economic growth and broadening the tax base will suffice in paying the debt while opposing Azimio proposes restructuring the debt.

President Ruto said he hopes the 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 the Treasury officials failed to offer an alternative solution to the debt crisis.

The new President, however, changed tack to call for debt restructuring faced with the harsh international debt market that is demanding a premium to lend to Kenya in what has seen the Treasury cancel a Eurobond issue and planned syndicated loans.

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