Kenya’s low risk debt window under threat, say economists

Taxpayers queue at Railway Grounds, Nairobi, last year to seek assistance in filing the 2016 returns ahead of the June 30 deadline.  PHOTO | MARTIN MUKANGU
Taxpayers queue at Railway Grounds, Nairobi, last year to seek assistance in filing the 2016 returns ahead of the June 30 deadline. PHOTO | MARTIN MUKANGU  

The Treasury should negotiate for longer debt repayment terms going forward, economists have said, warning that piling borrowing costs pose a major threat to the country’s low risk of default.

For the current financial year ending in June, about Sh658.22 billion has been budgeted towards serving the ballooning debt, which is estimated to have crossed Sh4.55 trillion last December, from Sh4.48 trillion in September.

The Kenya Revenue Authority targets Sh1.44 trillion in total tax collection during this period, meaning Sh4.57 of every Sh10 collected from taxpayers is likely to go into servicing debt.

“The big problem with debt service is that we (Kenya) have issued a lot of short-term debt. It is imperative that, if we continue on this foreign-funded infrastructure-led growth model, that we start lengthening the duration of our external debt,” said Stanbic Bank lead economist for East Africa Jibran Qureishi.

The Treasury has resorted to short-term expensive loans to bridge the rising gap in the Budget after the window for cheaper long-term multilateral concessional loans closed. This was after the economy was upgraded to lower middle-income status following a rebase on September 30, 2014.

Latest available data from the Central Bank of Kenya show that commercial loans have been the main driver of a spike in foreign debt, which stood at Sh2.31 trillion last September — Sh190 billion shy of the Sh2.5 limit approved by the National Assembly in December 2014.

Expensive loans from foreign banks jumped 60.89 per cent to Sh712.1 billion in June 2017, for instance, from Sh442.6 billion a year earlier.

Kenya has ramped up spending in recent years to build a modern railway, new roads and electricity plants, piling up borrowing costs on the Exchequer.

The pressure has been accelerated by the shortening average maturities for Treasury Bonds — instruments through which the government borrows cash in the medium- to long-term.

The government is, for example, expected to repay Sh1.4 trillion in T-bills which will mature in 5.7 years from the end of 2017, from Sh112.6 billion in 6.2 years at the end of 2009 and Sh118 billion in nine years at the end of 2006, research analyst George Bodo wrote in his weekly column in the Business Daily.

“As part of measures to soften maturity risks on outstanding Treasury bonds, debt planners at the Treasury will need to consider issuing more longer-tenured bonds this year,” Mr Bodo said.

The Treasury on Tuesday opened sale of Sh40 billion T-bills which will mature in 15 years, offering investors 12.5 per cent annual return to be repaid every six months.

Mr Qureishi said the tenure for the planned second Eurobond, set to be floated before June, should also be extended to 15 years to allow the government ample time to spread the payments.

“But for you to borrow longer-term, you have to prove to investors that Kenya’s debt services costs are going to go down, debt is sustainable and Kenya is committed to medium-term fiscal consolidation,” he said.

Kenya raised $2.75 billion (Sh283 billion) from international investors in the debut five-year and 10-year debt issues which mature next year and 2024, respectively, but political questions were raised over how the funds were spent.

The biting debt repayment costs have elicited debate on whether heavy public investment in infrastructure development — the main recipient of borrowed funds — in the past 15 years has had the intended impact on economic growth.

Barclays Africa Group chief economist Jeff Gable told reporters last Tuesday that the private sector should be brought into infrastructure development to ease pressure of debt repayment costs on revenue.

“There must be opportunities for private participation that allow the government to use its tax revenue to do something else,” he said, adding that African countries were spending about a third of their revenue on servicing infrastructure-related debts.

Debt service costs are widely seen as a major downside risk to Kenya’s growth outlook of between 5.5 per cent and six per cent for 2018.

“While Kenya remains unlikely to default on its debt, growing interest payments and international banks’ shrinking appetite to provide further loans will result in lower public spending, which has been a key driver of economic growth in recent years,” London-based global consultancy Control Risks said in an outlook report on December 19.

The estimate for debt payment for the current fiscal year is Sh223 billion more than the Sh435.7 billion that taxpayers paid in the year ended June 2017.

About 57.1 per cent of Kenya’s national wealth (gross domestic product) was in debt in June 2017, and is projected to rise to 59 per cent in the current year to June, according to the Budget Review and Outlook Paper (BROP) released last September. 

“We will continue with the austerities as we work towards recovery on our revenue which were affected through the elections. We look forward to a speedy turnaround in our revenue performance,” Treasury Secretary Henry Rotich said on December 26. “With reforms on the revenue side and also on the expenditure side, we should expect to live within our fiscal targets that will ensure debt is sustainable going forward.”

Mr Qureishi, however, said the austerities should result in real budget cuts and not reallocation from one sector to another, as has been the case since the fiscal consolidation programme started in 2015.