The Treasury should scale back its external borrowing to reduce servicing costs, analysts say.
For the borrowing to fall, Treasury must, however, cut total public spending, which has been rising in the past few years.
External loans have been rising faster than domestic debt thereby exposing Kenya to risks related to currency as well as adverse changes in global yields.
“Given the spotlight on Kenya’s fiscal position, ideally it may be sensible to scale back on external borrowing. However, for this to happen, the propensity for expenditure also needs to be restrained,” Stanbic Bank’s regional economist for East Africa Jibran Qureishi said.
He noted that the government may still have no choice but to borrow during this fiscal year because it had already committed to do so in the 2018/19 Budget for purposes of refinancing existing external debt.
However, the State needs to improve its fiscal position — which would include cutting its deficit and increasing total revenues — if it is to source any Eurobond debt cheaply, Mr Qureishi said.
Sterling Capital noted the fast growth of external debt and advised that there is need to balance between it and domestic debt. Accumulation of too much domestic debt could crowd out the private sector from the credit market, the analysts at Sterling said in a new report.
“Kenya appears to have a growing appetite for external debt both sovereign issues and commercial financing. This presents the government with a few challenges considering that it has little control over external influences such as yields in the United States and other global markets and the exchange rate, which has a significant impact on interest rate payments,” said the Sterling report.
As at July 17 the total debt was over Sh5 trillion with the public indebted to foreigners to the tune of Sh2.305 trillion and Sh2.13 trillion to local lenders.
Sterling also noted that despite the fast growth in external debt, one major advantage it had was that it had enabled the country to increase its foreign exchange reserves, which in turn had supported the Kenyan shilling in the past few months.
“The impact of the receipt of funds from the issue of sovereign bonds on the country’s official foreign exchange reserves is clearly evident … This together with periodic receipt of funds from the syndicated loans [has pushed reserves high],” said Sterling.