- First of all Kenya’s fiscal trajectory is weak.
- Second, the country’s debt-load has become unsustainable and is putting a strain on public finances.
- Finally, the debt suspension should target anything between Sh100 billion to Sh200 billion in annual debt servicing costs over the next three fiscal years, for it to make sense.
The coronavirus pandemic has opened a unique sovereign debt relief window for loan-distressed countries and Kenya must also take advantage and seek debt service suspension (DSS) from its creditors.
There is not much of a choice anyway. First of all Kenya’s fiscal trajectory is weak. Revenue is underperforming (with collections since July 2020 coming in below targets), while at the same time expenditures are not relenting.
Second, the country’s debt-load has become unsustainable and is putting a strain on public finances. In the last fiscal year 2019/20, the government spent Sh651 billion (or 41 percent of ordinary revenues) to service public debt. The previous fiscal year 2018/19, it spent Sh850 billion (or 56.7 percent of ordinary revenues) to service both domestic and external debt. These are figures the government cannot afford to pay if it wants to stay afloat amidst the pandemic.
In the current fiscal year 2020/21, the Treasury is projecting total debt service, including redemptions, at a whooping Sh905 billion (or just about 47 percent of revenues). However, such a move must be executed with stealth. First, to avoid spooking the international commercial debt market, the debt service suspension needs to be targeted at bilateral and multi-lateral creditors.
In the current fiscal year 2020/21, debt service to bilateral and multi-lateral creditors will amount to some Sh200 billion, including principal and interest; a figure which will further rise close to Sh300 billion next year. Top creditors in the bilateral and multilateral category is the World Bank and China, both of which account for two-thirds of total bilateral and multi-lateral debt, followed by the African Development Bank. Secondly, the DSS should be two-pronged: (i) suspension of debt payments; and (ii) extension of maturity dates.
The maturity profile is also somewhat a cause of concern. The amount of external debts maturing within four years increased to nine percent as at June 2020, from just 2.9 percent a year earlier (but largely due to the upcoming maturity of the 10-year international sovereign bond of $2 billion in fiscal year 203/24). Similarly, the amount of external debt maturing within ten years shrunk to 63 percent from 76.3 percent. Lengthening the maturity profile of external debts can also deliver a much-needed fiscal space.
Finally, the debt suspension should target anything between Sh100 billion to Sh200 billion in annual debt servicing costs over the next three fiscal years, for it to make sense. And to achieve that, China will be one of the top targets.
In the current fiscal year, debt repayments to China have been budgeted at Sh95 billion, and will rise to Sh120 billion next year (or about a third of total external debt service). The other major external debt service payments in this category is to the World Bank, with some Sh26 billion budgeted in the current year and a further sh32 billion next year.
If Kenya fails to tap into this pandemic relief window then the fiscal space will narrow, which could raise the chances of debt seizures over the next three years. Already, the Treasury is forecasting public debt service to rise to half of ordinary revenues by 2023, which would leave little space to finance critical development projects and lower economic growth rates.