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IMF, rethink Kenya’s debt sustainability

IMF

Signage at the International Monetary Fund (IMF) headquarters in Washington, DC. PHOTO | AFP

One of the hottest debates today is whether Kenya’s public debt remains sustainable. Debt sustainability analysis is simply forming expectations about the future performance of a country’s debt repayment.

Analysts and credit-rating agencies forecast that Kenya’s public debt is unsustainable and it is time the Treasury re-assessed our debt sustainability trajectory.

On the hand, the Treasury holds that Kenya’s public debt remains sustainable, a position the Treasury Cabinet Secretary reiterated in his budget statement last week. To showcase their confidence in the country’s debt sustainability, Kenya will be borrowing a record Sh930 billion in the coming financial year. This confidence is backed by the IMF which also holds the same position that the country’s debt remains sustainable.

Before we get into the question of debt sustainability, there is one inconsistency in the budget. In the recent IMF Country Status Report, the Treasury planned to float Eurobonds amounting to Sh781 billion within 18 months from April, with Sh550 billion going exclusively to debt management.

So far, Kenya plans to float a Eurobond before the end of this financial year which is end of June. But in the budget, the Treasury states that external debt redemption is only Sh262 billion.

If Treasury plans to refinance only Sh262 billion worth of foreign debt, does that mean Sh519 billion is what it plans to borrow before the close of this financial year? Or has the Treasury disembarked from the IMF debt management programme?

On Kenya’s debt sustainability, the IMF is misleading the Treasury, though this is not new. The IMF has a history of inaccurately forecasting economies in distress; Greece in 2010-2012 and Argentina in 2018-2020.

First, to conduct a quality debt sustainability analysis, it is crucial to accurately forecast a country’s economic growth prospects to determine capacity to respond to its repayment obligation. But both the Treasury and IMF always have an optimism bias when modelling economic growth prospects. In this financial year, despite being knee-deep in a global pandemic that shut nearly all sectors of the economy, the Treasury had its growth target at more than three percent.

In the coming financial year, the Treasury has a growth prospect of 6.3 percent and believes we will achieve it even before we achieve herd immunity.

Second, IMF’s debt sustainability analysis framework has been noted to have a significant weakness, the reason for its late detection of economies in debt distress.

Its debt sustainability analysis framework separates balance of payment from the assessment of public debt sustainability. It uses a single template, which is public debt to GDP as the main indicator, regardless of the domestic and external vulnerabilities. For the IMF, if a country’s debt level allows them to roll over matured debt at low risks and enhance growth potential, then the country is on a sustainable path.

Debt servicing cost-to-revenue and foreign debt servicing cost-to-exports, which looks at a country’s vulnerability do not really matter. This is the reason the IMF in its country-status report said Kenya’s public debt is sustainable and at the same time high risk of distress.

Reality is that Kenya is already in debt distress; the recent Institute of Economic Affairs (IEA) Budget Focus Report notes that even though Kenya has not broken the public debt-to-GDP threshold of 74 percent, which is now 63.4 percent in 2021, we have breached the public debt to revenue and grants threshold of 300 percent by 56 percent to stand at 356 percent in 2021.

We have also breached the debt service to revenue and grant ratio threshold which is 30 percent by 38 percent to stand at 68 percent in 2021.

So, it is true that we are two financial years away from a crash as noted by the IEA chief executive Kwame Owino, and IMF will be late to call it.