Treasury secretary Henry Rotich: The Jubilee administration has ramped up spending since 2013 to build a modern railway, new roads, bridges and electricity plants, driving up borrowing to plug the budget deficit. FILE PHOTO | NMG
A fresh Treasury report tabled in Parliament shows debt repayments will hit a record Sh1 trillion in the financial year 2018-19.
This represents a sharp increase from the Sh658.23 billion budgeted in the current year that ends in June.
The debt repayments bill will be nearly three times the Sh372.7 billion allocated to the 47 county governments in 2018-19 and also dwarfs the Sh612.9 billion to be spent on development projects.
The Treasury will spend Sh54 out of every Sh100 collected from taxpayers to repay public debt in the coming financial year starting July, reflecting the heavy toll that short-term, expensive loans are taking on the national budget.
A fresh Treasury report tabled in Parliament shows debt repayments will hit a record Sh1 trillion in the financial year 2018-19, equivalent to just over half of the expected tax revenue collection.
This represents a sharp increase from the Sh658.23 billion budgeted in the current year that ends in June, and the Sh435.7 billion paid in the year ended June 2017.
“Refinancing risk is significant as debt maturing in one year (from June 2018) as a percentage of revenue is 54.4 per cent,” Treasury secretary Henry Rotich says in the Medium Term Debt Management Strategy tabled in the National Assembly late Wednesday.
The debt repayments bill will be nearly three times the Sh372.7 billion allocated to the 47 county governments in 2018-19 and also dwarfs the Sh612.9 billion to be spent on development projects.
The rate of growth of tax revenue relative to increase in public debt is considered a reliable yardstick in assessing sustainability of a country’s loan repayment obligations.
Debt-to-GDP ratio
Another commonly used measure is the debt to gross domestic product (GDP) ratio, which assesses the size of loans relative to the economy.
Kenya’s current debt-to-GDP ratio stands at about 51 per cent.
“The debt management strategy strives to reduce refinancing risk, while being mindful of exchange rate (shilling) risk exposures, mainly on external commercial debt.”
The Treasury projections show that repayment of domestic debt will account for 81.48 per cent of the $9.72 billion debt payment obligations next financial year, with foreign loans making up the 18.5 per cent balance.
Mr Rotich said 37.7 per cent, or Sh818.02 billion, of the nearly Sh2.17 trillion ($21.018 billion) domestic debt outstanding as at the end of June will be due for repayment within 12 months, while Sh182.18 billion ($1.8 billion) of the Sh2.21 trillion external debt will also have matured.
Foreign loan obligations will, however, rise to $4.4 billion (Sh445.32 billion) in June 2024 upon maturity of the $1.5 billion 10-year Eurobond and other external repayments such as syndicated and commercial loans.
“Most syndicated loans carry an acceleration clause in case the government settles for an international debt capital market issuance during or after the fiscal year (2018-19). This has the implication of repaying syndicated amounts in full before their full term,” says Mr Rotich.
US credit rating firm Moody’s on Tuesday cited rising debt repayment pressures in its report downgrading Kenya government’s credit score to B2 from B1. Moody’s, however, assigned Kenya a stable outlook.
“The fiscal outlook is weakening with a rise in debt levels and deterioration in debt affordability that Moody’s expects to continue,” said the international ratings firm.
Mr Rotich expects growth in outstanding total debt to slow down to Sh4.38 trillion in June from Sh4.57 trillion last December, with average time-to-maturity of 7.1 years (4.4 years for domestic debt and 9.7 years for external loans).
“Approximately 50 per cent of the total government debt portfolio is exposed to exchange rate risk,” Mr Rotich says.
“The main exposure is to US dollar (67.3 per cent), followed by Euro (16.6 per cent), then JPY (Japanese Yen) and GBP (sterling pound) at 6.3 per cent and 2.9 per cent, respectively.”
To ease high refinancing and exchange rate risk, the Treasury plans to cut the share of Treasury bills in domestic debt to 13 per cent from 35 per cent and contract medium- to long-term bonds of 15 to 30 years in the next three years.
The strategy, Mr Rotich says, will increase “quantum on external debt while the domestic issuance concentrates on the medium to long-term tenors”.
“This is aimed at reducing the refinancing risks associated with the short-term debt and also improve trading in secondary market through increased volumes.”
President Uhuru Kenyatta (right) and Cabinet Secretary for Treasury Henry Rotich at a past event. PHOTO | SALATON NJAU | NMG
The Jubilee administration has ramped up spending since 2013 to build a modern railway, new roads, bridges and electricity plants, driving up borrowing to plug the budget deficit.
The Treasury in the Budget Policy Statement 2018 projects fiscal deficit to slow to Sh587.7 billion next financial year from Sh620.8 billion in the current year.
That is an equivalent of six per cent of gross domestic product (GDP) from 7.2 per cent in the 2017-18 year.
“When you consistently start crossing five per cent (fiscal deficit) for a number of years, you start running into problems meeting your financial obligations,” Citibank chief economist for Africa David Cowan said on Tuesday.
“The solution? Bring and keep inflation rate down and issue long-term local debt as much as you can. That’s the way forward. That’s what most countries do.”
The gap in the Sh2.49 trillion budget in fiscal year 2018-19 will be bridged through Sh368.8 billion domestic borrowing and Sh214.7 billion, Mr Rotich says in the BPS 2018 which was also filed on Tuesday.
