Kenya’s debt servicing obligations have dropped significantly following a rollover of Sh192 billion domestic debt that was due for settlement by June.
The Treasury’s latest debt management report shows that debt servicing obligations for the current financial year ending June have dropped to Sh466.23 billion from Sh658.23 billion earlier, easing pressure on the Exchequer.
Treasury principal secretary Kamau Thugge said the drop in debt servicing obligations had resulted from adjustments done to eliminate rollovers.
“The estimates for domestic borrowing and domestic debt repayments were adjusted to eliminate the ‘roll-overs’ in line with the fiscal framework,” Dr Thugge said.
“The roll-overs amounting to Sh192 billion do not represent actual cash outflows. Rather, the lenders opt to roll-over or re-invest the securities for a further specific period.”
That has reduced the projected share of the government revenue going into debt servicing by more than 13 percentage points to 32.38 per cent – meaning the Treasury will now spend just about Sh3 of every Sh10 collected in revenue to service debt.
Total public debt stood at Sh4.57 trillion by end of December 2017.
Treasury’s financial statement published in the Kenya Gazette shows that the drop in debt servicing obligations has also helped lower the domestic borrowing target by Sh200 billion to Sh330.89 billion, just three months to end of the current year.
Dr Thugge did not offer details of the transactions but a rollover happens when the borrower takes another loan for the same amount of a maturing security rather than pay off the principal or the lender re-invests the same money in a new facility.
The new debt may come with new terms, including interest rates and tenure. Commercial banks, which have cut loans to businesses and individuals since the coming into force of the law capping interest rates in September 2016, control more than half of the domestic debt.
As at March 16, banks controlled 53.3 per cent of the Sh2.34 trillion domestic debt, followed by pension schemes (27.1 per cent), parastatals (6.8 per cent) and insurers (6.3 per cent). The rest of investors account for only 4.5 per cent of the total domestic debt.
The Treasury has in recent years increasingly contracted short-term domestic debt, largely through Treasury bills, to meet arising cash obligations – in a move that has more than halved the average time to maturity for domestic debt to 4.4 years.
The Medium Term Debt Management Strategy for 2018 to 2021 released in February indicates that at 4.4 years the average maturity time of domestic debt is less than half the 9.7 years for external debt, causing Tresury secretary Henry Rotich to warn of a major refinancing risk in the domestic front.
“The government is exposed to refinancing risk. As at end of FY 2017/18, the main refinancing risk is associated with high domestic debt repayments…,” Mr Rotich says in the debt management report.
He says that to ease high refinancing and exchange rate risk, the Treasury has resorted to medium-to long-term bonds of 15 to 30 years in the next three years.
That would effectively cut the share of Treasury bills in domestic debt mix to 13 per cent from 35 per cent.
Mr Rotich says that shift will increase the “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.”