Aggressive interest rate increases by central banks in rich countries amidst sustained weakening of the shilling have cost Kenya an additional Sh27.23 billion in foreign debt repayments, the Treasury has said, eating into the budget for development projects.
The Treasury has received approval from lawmakers to raise expenditures on external debt in the current financial year ending this Friday to Sh389.45 billion from Sh362.22 billion, which had been projected in February.
The request to increase spending on foreign debt by 7.5 percent was granted through the second supplementary budget last week.
Haron Sirima, the director-general for Public Debt Management Office at the Treasury, said increased spending on external creditors has been necessitated by increases in floating rate bases.
International lenders largely use the London Inter-Bank Offered Rate (Libor), which will be phased out this month, and the US prime rate as reference rates onto which they add their margins when pricing loans.
“The upward revision in external interest and redemption is primarily because of exchange rate depreciation and floating rate base increases,” Dr Sirima told the Business Daily.
The three-month Libor rate for dollars has this year crossed five percent levels for the first time since the global financial crisis 15 years ago, while the US prime rate is above eight percentage points from about 4.38 percent a year ago.
The recent jumps in global reference rate have largely been on the back of sustained increases in interest rates by global central banks in the race to rein in the stubbornly elevated inflationary pressures, currently being driven by price growths for services.
The rising debt costs have further been pressured by the significant depreciation of the shilling against the US dollar.
The Kenyan currency has defied the central bank’s foreign exchange code and a government-backed deal to import fuel on credit to shed about 13.84 percent of value to the dollar since the beginning of the year and nearly a fifth in the past year.
Central Bank of Kenya (CBK) Governor Kamau Thugge said the slide in the shilling, which usually increases the burden of foreign debt repayments on taxpayers, should have been deeper were it not for the deal the William Ruto administration struck with Saudi Arabia and the United Arab Emirates to import petroleum products on a six-month credit window from March.
Dr Thugge said the deal has saved the country about $500 million which would have been spent by oil importers, helping ease pressure from the mismatch between the demand and supply for the US currency.
Treasury data show interest expenses on the foreign debt has gone up by Sh16.50 billion, or 11.92 percent, to Sh154.94 billion, while redemptions have bumped Sh10.74 billion, or 4.80 percent, to Sh234.51 billion, both compared with earlier projections in February.
The debt servicing costs have been climbing in recent years after the grace period extended by rich countries, particularly China, expired amidst repayments for domestic debt fast falling due.
The Treasury spent nearly Sh1.02 trillion on domestic and foreign debt repayments for 11 months through May. That was equivalent to 58.60 percent of Sh1.74 trillion tax receipts in the review period, impeding spending on development projects in a country experiencing growing poverty levels and plagued by rising youth unemployment.
This has left little cash for building roads and affordable housing units, revamping of the ailing health sector and putting up power plants for cheap electricity — all of which are key for industrial development and job creation.
“I do believe that the fiscal framework of the National Treasury has incorporated all these debt service payments, including the impact of a higher exchange rate,” Dr Thugge said.
“They have a plan to reduce the overall fiscal deficit and to achieve a sustainable debt position and fiscal position over the medium term.”
The rising burden of debt servicing costs on taxpayers is a reflection of increased borrowing during the previous administration of Uhuru Kenyatta, in which Dr Ruto served as Deputy President, to build infrastructure such as roads, power lines and a modern railway line.
Kenya’s debt binge is underlined by Eurobond offerings, a package of Chinese loans and syndicated commercial loans over the years which are now squeezing its finances as the loans fall due.
The International Monetary Fund and the World Bank Group have since 2020 classified Kenya as being at a high risk of debt distress since 2020 as a result of persistently large budget deficits, which are bridged through borrowing.