Treasury’s three-month borrowing spree hands Washington-based lender top spot
The Treasury took Sh54 billion World Bank loans in a three-month borrowing spree that has seen the Washington DC-based lender regain its top spot above China in the ranking of Kenya’s biggest creditors.
A new Treasury report puts the World Bank’s total lending to Kenya at Sh581 billion ($5.8 billion) as at the end of June, slightly ahead of China’s Sh557 billion ($5.5 billion)
The two lenders alone now account for about one fifth of Kenya’s total public debt load, which has already crossed the Sh5 trillion mark.
The hefty loans owed to China and the World Bank give the two significant influence on the country’s economic policy planning.
China had raced ahead of the World Bank at the end of December to become Kenya’s biggest creditor for the first time ever, largely on account of the loan borrowed to finance construction of the standard gauge railway (SGR).
The Treasury report shows China was still ahead of the World Bank as at end of March, but the ranking changed quickly in the three months to June.
The new World Bank loans were part of the borrowing intended to plug the Treasury’s budget deficit for the fiscal year 2017/18. The World Bank channelled the money mainly through its concessionary lending arm, the International Development Association.
International Budget Partnership (IBP) researcher John Kinuthia in an interview last week said it was inevitable that Kenya had to borrow huge amounts as the financial year came to a close.
“We should look at the whole issue of public debt from the point of view of the fiscal deficit. If the planned deficit is over Sh500 billion, as indeed it was, then such money coming from the World Bank should not surprise us,” said Mr Kinuthia.
In the 2017/18 fiscal year, the realised deficit was Sh596.6 billion, including grants, with the domestic borrowing at Sh273.7 billion and the rest coming from overseas or international lenders.
The total deficit amounted to 7.1 per cent of the gross domestic product, slightly less than the programmed 7.2 per cent.
In the three months to June, the Chinese increased their debt to Kenya by Sh24 billion, less than half of what the World Bank advanced the Treasury within the quarter.
The accumulation of Chinese debt has caused anxiety among analysts and activists in recent times as it increased to hundreds of billions of shillings in just a few years while its repayment terms are not made public.
The most notable project funded by the Chinese is the SGR, whose commercial viability has been the subject of intense scrutiny.
Mr Kinuthia says that any attempt to cut the public debt must begin with the Treasury drafting a slim budget that minimises the fiscal deficit.
Given Parliament’s role in budget making and debt management, the House should also be another point at which such debt reduction should start, he adds.
Public debt levels have not yet reached Parliament’s approved maximum of 74 per cent as a ratio to the gross domestic product, but repayment had already exceeded the recommended 30 per cent as a proportion of ordinary revenue, mostly comprising taxes.
“A middle-income country like Kenya should spend no more than 30 per cent of its ordinary revenue in repaying debt. A developed country like Canada or Norway can spend as much as 35 per cent, but Kenya should not exceed 30 per cent.
"The public debt to GDP ratio is just one measure, but the one of servicing to ordinary revenues should be given more weight,” Mr Kinuthia said.
58pc of GDP
Kenya’s debt level is currently at about 58 per cent of the GDP.
The proportion has remained lower than expected because the nominal GDP was higher than was originally programmed for the end of June.
The data shows that the GDP stood at Sh8.85 trillion, higher than the target of Sh8.68 trillion.
Kenya’s classification as a middle-income country following the rebasing of the GDP in 2014 has been a disadvantage in negotiations for cheaper credit terms.
The amount of cash given to Kenya in form of grants, which does not normally have an interest charge, has fallen significantly, leading the country to increase its commercial borrowing.
Kenya’s GDP rose by more than a quarter following the rebasing.
“Free cash to Kenya in the form of grants has reduced. We decided we wanted to rebase our economy and that cut us off this cash. We have to pay for it through higher debt servicing,” said Mr Kinuthia.