- IMF says concessional borrowing should be key to financing investment projects due to cost and longer maturity.
Kenya should seek the release of the more than Sh1 trillion that donors have signed to lend so that the country can stop paying commitment fees that continue to raise its indebtedness.
This is the advice of the International Monetary Fund (IMF) following its recent release of nearly Sh75 billion to support the country’s budget implementation following the crisis brought about by the new coronavirus.
But gleaning from the Treasury debt management documents, the issue of signed-for but unreleased funds is not directly addressed.
The IMF is giving this advice after noting that Kenya’s debt moved from a moderate to a high level of distress, after a spate of borrowing from both external and internal sources in recent years.
This is also only public debt but there is also private debt that is also rising with some international institutions, such as African Guarantee Fund, giving guarantees to small and medium enterprises (SMEs) to give comfort to commercial banks to restructure their loans to make them easier to service.
“Kenya has about $10 billion [Sh1.06 trillion) of committed but undisbursed official development assistance. To avoid commitment fees on undisbursed funds and reduce reliance on commercial financing, measures should be taken to unblock this low-cost financing,” says the IMF.
The Treasury has committed to reducing its external indebtedness especially the commercial type to cut the costs of servicing it, but it remains relatively high and more so after the recent borrowing associated with tackling the new Coronavirus pandemic.
Kenya has recently not only borrowed from the IMF and the World Bank but is also leveraging cheap liabilities to get more from other bilateral and multilateral lenders.
Even the donors are also encouraging the country to seek more of the concessional as opposed to the nonconcessional debt to cut associated expenses.
“The authorities are encouraged to further strengthen their debt management capacity to manage and prepare for large repayments on commercial borrowing. As part of this strategy, it is expected that the authorities will have a strategy on near-term external refinancing and over the next years, refinance loans at a longer maturity to limit refinancing risks,” says the IMF.
“At the same time, concessional borrowing should continue to play an important role in financing investment projects due to its lower cost and longer maturity profile, while non-concessional borrowing should be limited to finance those projects with high social and economic returns.”
The point is that Kenya can only achieve fiscal consolidation by reducing the amount dedicated to servicing debt, which would, therefore, free up cash for projects.
It would mean cutting all that contributes to its indebtedness. The debt involves not just money it directly borrows for repayment as the national government but also that which it pays in fees and that which it guarantees its corporations and SMEs to borrow or restructure their facilities.
“Delivering on fiscal consolidation is essential to further reduce risks. At the same time, the authorities are encouraged to expand the coverage of public debt to include county governments, extra budgetary units, and non-guaranteed SOE [State-owned enterprises] debt, and continue improving public debt management and revenue administration, which will be key to maintaining debt sustainability,” says the IMF.
The multilateral lender notes that while Kenya’s public debt remains sustainable, the downgrade in the debt risk rating is a consequence of the impact of the global Covid-19 crisis which has made vulnerabilities worse.
It notes further that “the pandemic has dampened exports and economic growth, resulting in a breach of solvency and liquidity indicators thresholds related to exports. This notwithstanding, the authorities expect that Kenya’s debt indicators will improve as exports rebound, once the global shock dissipates.”
The IMF estimates that the pandemic will push up total public debt from about 61.7 percent of the gross domestic product (GDP) at the end of 2019 to 69.9 percent in 2022 but could decline thereafter.
That would be only marginally below the peak of 70 per cent, which is what the Treasury has proposed and Parliament has approved as the maximum public debt-to-GDP ratio in present value (PV) rather than nominal terms.
“Under the baseline scenario, total public debt as a share of GDP is expected to increase through 2022 on the back of the Covid-19 crisis, and then gradually decline over the medium-to-long term and remains firmly below the benchmark in PV terms. Public sector debt is projected to increase from 61.7 percent in 2019 to 69.9 percent in 2022, followed by a gradual decline. It remains strictly below the benchmark of 70 percent of GDP in PV terms,” says the IMF.
Clearly, that essentially means the Treasury can hardly talk about fiscal consolidation or deficit reduction in the medium term without cutting to the bone in view of Covid-19.
When the Treasury was making its programme-based budget (PBB) in April, it appreciated the impact of the pandemic on the public spending, but failed to delineate the exact amount that it would need to handle the issue apparently because it was not in a position to make a realistic estimate.
The IMF has estimated that Kenya needs at least Sh223 billion in external or hard-currency financing to plug the gap opened by the disease but the Treasury had earlier said it was looking for Sh122.5 billion from foreign donors.
The Treasury had planned, as shown in the most recent Budget Policy Statement, to cut its fiscal deficit in the 2020/21 budget to less than what it would be for the year ending this month, but did not revise this to reflect the new realities brought about by the new disease.
The Treasury had said that the deficit would be at 6.3 percent but this now appears to have been an overestimation. The IMF reckons that the fiscal consolidation target for the year was “ambitious” even before taking account of the new pandemic.
“As we finalise preparation of the budget for the FY 2020/21, we are cognisant of our limited fiscal space occasioned by revenue shortfalls and rising expenditure pressures.
“To reverse this situation, the government will continue to pursue the fiscal consolidation policy in order to provide and maintain necessary balance between revenues and expenditures.”
It then went ahead to project a 4.9 percent fiscal deficit for 2020/21, which is now near impossible because the pandemic has forced the State to make unprecedented responses to tackle it with adverse implications for revenue collection.
“The objective is to ensure that the overall fiscal deficit is kept under control and to a bare minimum to safeguard macroeconomic stability and reduce the pace of growth of the public debt. In this regard, fiscal deficit is projected to decline gradually from the estimated 6.3 percent of GDP in FY 2019/20 to 4.9 percent of GDP in FY 2020/21 and further to around 3.0 percent of GDP over the medium term,” said the Bretton Woods institution.
Even when there are no major disasters or crises like that precipitated by Covid-19, the Treasury has found it extremely difficult to meet its stated fiscal consolidation targets which partly explains the accumulation of debt.