Kenyas debt carrying capacity weakens: IMF report

The International Monetary Fund (IMF) has trimmed Kenya’s ability to carry debt from strong to medium based on weakening growth, export metrics.

In its report published earlier this week, the multilateral lender has also cited lower reserve coverage in its revision of the country’s dent carrying capacity.

A downward revision in Kenya’s 10-year average growth rate from 5.7 per cent to 5.1 per cent for instance contributed to an estimated 14 per cent fall in the carrying capacity composite indicator score.

IMF’s debt sustainability analysis (DSA) nevertheless has Kenya’s debt as sustainable with the present value (PV) of public and publicly guaranteed debt (PPG) as a share of GDP predicted to remain below 40 per cent throughout the next 20 years.

“It also remains below the threshold under the most extreme shock-a one-time depreciation,” stated the report.

Debt indicators in terms of exports nevertheless are in breach of prescribed thresholds driven largely by a slowdown in exports and higher external debt.

Kenya is for instance in breach of one solvency ratio- the present value of guaranteed debt to export ratio and one liquidity indicator- the debt service to exports ratio.

The PPG external debt to export ratio is predicted to remain above the 180 per cent threshold to the year 2027 while the debt service to exports ratio remains above the 15 per cent limit through the six year period.

Upcoming Eurobond repayments in 2024 and 2028 are expected to heighten breaches to the debt sustainability metrics in the medium term.

Last year, the IMF moved Kenya’s rating of debt distress from medium to high attributing the reclassification to shocks emanating from the COVID-19 pandemic.

In its report this week, the Bretton Wood’s institution highlighted key reforms to reversing Kenya’s debt vulnerabilities including a restructure of struggling state owned enterprises (SOEs), the roll out of new taxes and spending cuts.

At Ksh.7.3 trillion, Kenya’s debt stock at the end of 2020 stood at an estimated 69 per cent of GDP a representation of high budget deficits over the years to finance infrastructure projects.

About half of Kenya’s debt is owed to external creditors with 40 per cent of the stock being held by multilateral creditors.

Bilateral creditors meanwhile hold 33 per cent of the external debt, of which 63 per cent is owned to non-Paris club members such as China.

The balance of external debt is held by commercial lenders with 70 per cent of this, or about Ksh.659 billion being Eurobonds.

The stock of domestic debt at the end of 2020 meanwhile covered about 30 per cent of GDP with 70 per cent of the stock representing Treasury bonds (T-bonds).

About half of the local debt is held by commercial banks.