Eurobond raises Kenya’s public debt to Sh5.8trn

The Sh210 billion Eurobond signed in May contributed to a sharp increase in the country’s public debt load to Sh5.81 trillion as at the end of June, a new Central Bank of Kenya (CBK) report has shown.

The latest CBK weekly report shows that Kenya borrowed on average Sh129.5 billion per month in the last three months of the 2018/2019 fiscal year, indicating a rush to close the budget deficit that stood at Sh635 billion for the year.

The outstanding stock of external debt hit Sh3.02 trillion by the end of June, while domestic debt stood at Sh2.79 trillion. This was an increase of Sh488.4 billion compared to March 2019, and Sh770 billion compared to the debt levels in June 2018.

Public debt has expanded by an average of Sh680 billion annually in the past five years.

The rapid rise in debt has once again turned the spotlight onto the below-par revenue collection in the country, which has seen the government overshoot its annual borrowing projection, giving the image of fiscal indiscipline.

The Treasury had projected net borrowings of Sh631.6 billion in external loans (Sh321.5 billion) and domestic debt (Sh310.1 billion) in the just ended financial year, but ended up taking Sh770 billion in additional loans.

“Now it seems the (borrowing) targets do not make sense. I don’t see anything compelling from a policy point of view to show that we are out of the woods yet,” said Churchill Ogutu, a senior analyst at investment bank Genghis Capital.

The Kenya Revenue Authority collected Sh1.44 trillion taxes in the financial year ended June, falling short of the Treasury-set target by Sh72.7 billion.

Fiscal deficit

The low revenue collection makes it difficult to close the fiscal deficit to three percent of GDP by 2022 from the estimated 6.8 percent in 2018/19.

The Treasury hopes to bring down the gap to 5.6 percent, or Sh607.8 billion in the current year, but this is based on optimistic revenue performance of Sh2.1 trillion.

The projected net borrowing this year is Sh324.3 billion externally and Sh283.5 billion from the domestic market.

Efforts to curb spending are hampered by a bloated public wage bill, while an infrastructure deficit and political considerations mean that the government finds it hard to cut development spending.

Commercial external borrowing, such as the Eurobond and syndicated loans, have however been the most controversial, due to the cost implications and exposure to foreign exchange risk.

In May, the Treasury took up a Sh210 billion ($2.1 billion) Eurobond in two tranches of seven and 12-years, which carry an interest charge at the rate of seven and eight percent respectively.

Part of the funds were used to roll over the Sh77 billion ($750 million) maturing, five-year tranche of the Eurobond.

This was Kenya’s third Eurobond, following the debut $2.75 billion (Sh283 billion) sale in June 2014 that was made in two tranches of five years (Sh77 billion) and 10-years (Sh206 billion).

In February last year the country floated its second bond, raising $2 billion (Sh206 billion) in two equal tranches of 10 and 30-year maturities.

These outstanding Eurobonds will cost Sh46.5 billion ($451.5 million) in interest payments every year until at least 2024, when the 10-year 2014 issue matures.

New syndicated loans

Earlier this year, the government also took up Sh125 billion ($125 billion) in new syndicated loans to refinance maturing debt of the same nature, although the rates were not disclosed.

World Bank Vice-President for Africa Hafez Ghanem last month cautioned that there is a risk of future repayment difficulties if the proceeds are not invested in productive projects due to the high cost at which Kenya and other African countries are taking commercial loans.

On the domestic front, overshooting the borrowing target means that the Treasury is crowding out the private sector from the debt market, thus hurting growth of the economy.

Banks are also willing lenders to government, taking into account the risk-free nature of government securities especially at a time when the rate cap on customer loans makes it hard for them to price in default risks with the cost of lending capped at 13 percent.

The high demand for government debt from banks has cut interest rates on Treasury securities.

A substantive policy shift such as a successful repeal of the rate cap law would, however, raise loan costs for the Treasury as banks shift back to customer lending.