The World Bank has approved a Sh107 billion ($1 billion) loan for Kenya to help it close its Budget deficit and tackle the economic shocks arising from the global coronavirus pandemic.
The loan, which was initiated before the Covid-19 crisis started, is the second ever such direct lending for the Kenyan Budget from the World Bank in decades, after another debt of Sh75 billion was processed last year.
It also represents the largest amount disbursed by the World Bank, which announced Wednesday that the loan would be repaid until 2060. The bank also allowed the Treasury to start paying the principal in 2025 - after a grace period of five years - easing the quarterly repayment costs.
“Its approval is timely, since it will help fill the financing gap generated by the severe, ongoing shock to Kenya’s economy,” said the outgoing World Bank Country Director for Kenya, Felipe Jaramillo. He also pointed out that the loan was highly concessional and way cheaper than commercial debt.
Of the total amount, $750 million, which will come from the International Development Association, would be repaid over a 30-year period, after a grace period of five years, at 1.35 percent interest. The second component of $250 million, which will come from the International Bank for Reconstruction and Development, will have an interest rate of about two percent.
“This is in contrast to the cost of borrowing Eurobonds with the seven-year bond at seven percent and the ten-year bond at eight percent,” Mr Jaramillo said.
Kenya’s Budget deficit has swollen to 8.2 percent of GDP in the financial year to the end of June, from an initial forecast of under seven percent, mainly due to reduced tax collection and lost revenue from VAT and income tax cuts imposed to ease the effects of coronavirus on workers and companies.
Revenue collection is also expected to drop by Sh43 billion in three months due to the reductions on income tax, value-added tax and sales levy, the International Monetary Fund (IMF) warned after agreeing a Sh78.3 billion ($739 million) in emergency financing early this month to help Kenya respond to the economic shock caused by Covid-19.
Kenya’s ability to deal with unforeseen spending has been weakened, given that civil servants’ salaries, debt payments and allocation to counties already eat up 94 percent of government revenue.
Treasury Secretary Ukur Yatani Wednesday said the World Bank approval of the loan was a vote of confidence in the government’s handling of the economy amid the Covid-19 crisis.
“The... (World Bank) does not provide Budget support to countries with a weak macro framework,” said Mr Yatani. “This (loan) will help us reduce our move for commercial loans because it is highly concessional.”
There has been a rise in government borrowing since President Uhuru Kenyatta came to power in 2013 — a jump that some politicians and economists say is saddling future generations with too much debt.
Kenya’s public debt as a percentage of gross domestic product has increased to nearly 60 percent from 42 percent when Mr Kenyatta took office in 2013.