Heavy commercial borrowing raises debt load on taxpayers

Commercial banks tightened their grip on Kenya’s public debt at the end of 2018, latest national statistics show, exposing taxpayers to higher interest repayments.

The stock of debt contracted from domestic and foreign commercial banks hit nearly Sh2.23 trillion last December, accounting for 42.25 percent of the Sh5.27 trillion gross debt.

The share of commercial banks in the country’s rising debt climbed from 40.17 percent of the Sh4.57 trillion in December 2017 and 36.71 percent of the Sh3.83 trillion a year earlier.

The Treasury has racked up Sh822.56 billion fresh commercial debt in two years through December 2018 , with foreign banks accounting for Sh480.03 billion of that.

This underlines Kenya’s reliance on domestic and international (Eurobond) capital markets to raise funds to bridge the gaping deficit in the budget.

President Uhuru Kenyatta’s administration has largely been contracting short-term commercial debt since September 2014 to build economic growth-enhancing roads, bridges, power plants and the Standard Gauge Railway(SGR).

That started after Kenya became a lower middle income economy, limiting her access to highly concessional loans from development lenders such the World Bank Group’s International Development Association.

Bilateral lenders accounted for Sh894.05 billion, or 16.96 percent, of the total debt last December. China, Kenya’s largest single lender, accounted for 70.65 percent of the external debt with a portfolio of $6.2 billion (Sh620.66 billion) which largely come on semi-concessional terms.

The share of multilateral lenders such as the World Bank Group was Sh874.68 billion, or 16.59 percent of the gross debt stock in December 2018. Interest on commercial debt is market-determined unlike multilateral and bilateral loans which come on concessional and semi-concessional terms in addition to grace period.

“Commercial loans are expensive and a leaning towards this trend is increasing the country’s debt service,” the Parliamentary Budget Office, a professional unit which advises legislators on financial, budgetary and economic matters, warns in its Budget Watch report for the current financial year ending in June.

“This will invariably lead to higher interest payments.”

Treasury secretary Henry Rotich has budgeted for nearly Sh870.62 billion to be paid to creditors this financial year ending June 2019. This is more than half the revised Sh1.61 trillion in projected tax receipts, assuming there will be no debt rollover.

That comprises Sh505.96 billion in domestic obligations and Sh364.66 billion to foreign creditors.

Interest payments to domestic investors will gobble up nearly Sh285.61 billion, while another Sh220.35 billion will be spent on redemptions (principal sums) of maturing debt contracted locally.

About Sh250.28 billion will go into payment of principal amounts for foreign loans, while interest will eat up Sh114.37 billion, according to 2018 Medium Term Debt Management Strategy.

Treasury paid out Sh69.95 billion to external creditors in the July-December 2018 period, data in the quarterly Economic and Budget Review report shows, comprising Sh46.09 billion interest and Sh23.86 billion principal amount.

The report does not disclose payouts to domestic creditors.

Some Sh33.17 billion, or 47.43 percent, of the payments went to foreign commercial creditors, while bilateral and multilateral lenders pocketed Sh25.37 billion and Sh11.40 billion, respectively.

Payouts to external lenders are, however, set to rise in the second half of the current financial year (January to June 2019) when some of the facilities procured in recent years fall due.

Some of the major external debt repayments due between July 2018 and June 2019 include the debut Eurobond, whose first five-year tranche will be maturing, at Sh98.15 billion, Citi Bank syndicated loan (Sh86.64 billion) and Trade Development Bank (Sh50.29 billion), the Treasury data shows.

Others are the SGR financier Export-Import (Exim) Bank of China (Sh31.08 billion), World Bank’s IDA (Sh20.90 billion), second Eurobond floated February 2018 (Sh15.51 billion), France (Sh9.08 billion), Japan (Sh6.13 billion) and China Development Bank (Sh5.18 billion).

Repayments to the Asian Development Bank/Asian Development Fund (ADB/ADF) will amount to Sh4.46 billion, while Italy, Germany, Belgium, Spain and Saudi Fund will get Sh3.43 billion, Sh2.67 billion, Sh2.37 billion, Sh1.94 billion and Sh1.60 billion, respectively.

The figures are subject to shilling’s conversion rates against the US dollar.

Huge payments to creditors abroad may pile up pressure on the shilling if the country’s top foreign exchange earners such as agricultural exports, tourist receipts and remittances from Kenyan immigrants underperform.

Paul Muthaura, the chief executive of the Capital Markets Authority (CMA), has proposed that the Treasury should consider a mixture of dollar and shilling-denominated borrowing from international markets to cut Kenya’s exposure to foreign exchange rate risks.

A right balance between a shilling and foreign currency portions when issuing sovereign bonds such as Eurobond and contracting concessional loans, he said, will help ease the growing burden of servicing the country’s piling external debt.

“There’s no question about investor appetite for Kenya’s debt. It is time for us to start testing for shilling appetite among global investors to manage (foreign exchange) risks,” Mr Muthaura said on February 1.

Such a strategy has already been adopted in other countries such as India which has since 2014 been issuing rupee-denominated bonds in international markets for finance infrastructure development.