Dollar crisis piles pressure on Sh75bn State firms foreign debt

New ICT cabinet secretary Eliud Owalo receives documents from his predecessor Eliud Owalo

Treasury Cabinet Secretary Prof Njuguna Ndung'u during the handover by his predecessor Ukur Yatani (right) at the National Treasury on October 28, 2022. PHOTO | DIANA NGILA | NMG

State-owned enterprises (SoEs) are sitting on non-guaranteed foreign currency debt worth Sh74.9 billion, exposing them to higher financing costs due to the sharp depreciation of the shilling against the US dollar.

The dollar loans account for three quarters of the State-owned enterprises’ total non-guaranteed debt of Sh99.3 billion, according to the Treasury’s annual debt management report for the fiscal year ended June 2022.

Servicing costs for dollar loans have gone up for the parastatals due to the weakening of the shilling by 6.8 percent to the dollar this year, which has raised the cost of buying the greenback locally to pay external lenders.

Those looking to roll over existing dollar debt or contract new borrowing have also been hit with higher interest rate demands by potential lenders, largely due to higher rates on offer in safer, more attractive western markets.

Also read: Rate hikes in dollar market worry CBK

The Treasury has in the past two fiscal years been reporting in more detail the loans contracted by the State-owned enterprises, some of which are guaranteed by the Exchequer while others are non-guaranteed, meaning their liability falls solely on the contracting institution.

However, the fact that these entities are wholly or partly owned by the government means that a default of a non-guaranteed loan would still be borne by taxpayers, who would ultimately be called upon to bail them out.

The government has 260 State corporations, which finance their operations through internally generated revenues, borrowings and government transfers from the Exchequer.

“As at end June 2022, out of the 26 entities that submitted the status of outstanding loans, 19 SoEs [State-owned enterprises] had non-guaranteed debt amounting to Sh99.25 billion (equivalent to 0.8 percent of GDP) …the loans are performing and none was reported to be in arrears as at end June, 2022,” said the Treasury in the debt report.

“As a proportion of total non-guaranteed debt stock, a majority existed in the energy sector with Kenya Power, Kenya Pipeline Company (KPC), KenGen, National Oil Corporation of Kenya (Nock), Kenya Petroleum Refineries Ltd and Geothermal Development Company (GDC) holding 76.8 percent.”

Also read: Dollar reserves decline on debt repayment, reduced borrowing

Electricity distributor Kenya Power accounts for the largest share of the non-guaranteed loans portfolio at a total of Sh40.5 billion, out of which Sh30.74 billion is denominated in foreign currency.

KPC is second with a syndicated dollar loan of Sh15.1 billion, followed by the Kenya Airports Authority, which has three dollar facilities worth a total of Sh11.2 billion. KenGen owed Sh8.98 billion to dollar lenders, while Nock held debt worth Sh7.3 billion, taken up from two local banks.

The reporting of outstanding debt held by the State-owned enterprises has been a thorny issue for the government in recent years, with the likes of the World Bank pointing out that failure to do so has the potential of distorting the true picture of the country’s public debt position.

In addition to the non-guaranteed loans portfolio held by SoEs, the government has guaranteed another exposure of Sh145.4 billion, the bulk of it held by national carrier Kenya Airways (KQ) at Sh77.8 billion, the KPA at Sh33.5 billion and KenGen at Sh34.1 billion as at June 2022.

In the debt report, the Treasury said that the KQ debt guarantee had been called up by the Exim Bank of USA as a result of payment defaults. The loan was for the purchase of seven aircraft and one engine.

“Following the default KQ sought government intervention and the Cabinet gave approvals for the government to pay the loan arrears on behalf of KQ and the loan balance to be novated (replaced) to government. The arrears have been paid and the novation process is on-going and is expected to be finalised in the 2022/23 fiscal year,” said the Treasury.

KQ chief executive Allan Kilavuka, however, told The EastAfrican newspaper that the figure relating to the US Exim facility was about $485 million (Sh58.9 billion), meaning that the government may have also covered guarantees by other lenders to the airline.

The KQ guarantee call indicates the risk borne by the taxpayer for parastatal loans, especially those guaranteed to entities that have run into financial difficulties.

Most State corporations are highly indebted, compounded by persistent losses and cash flow challenges.

A World Bank study put total liabilities, including debt, tax and social security arrears, owed by the State firms at Sh2.4 trillion in 2020, warning that this poses a great risk to the government, which is ultimately liable for this debt.

[email protected]