Coronavirus pandemic deepens Kenya’s debt wound

The Covid-19 pandemic has added salt to Kenya’s long existing debt wound pushing the country closer to the edge of the cliff.

This is as the global health emergency takes a swipe at the country’s revenue base amidst rising expenditure needs.

Kenya’s debt problem has however long existed and persisted prior to the coronavirus crisis.

Years of higher spending against lower revenue collections have eclipsed the current administration rule to see it set new fiscal deficit ceilings on each progressive year.

According to data from the National Treasury, the annual fiscal deficit has expanded by more than three times to an approximate Ksh.900 billion in 2020 from Ksh.300 billion at the end of the 2013/14 financial year.

At the same time the stock of public debt has grown by 3.7 times to Ksh.6.28 trillion at the end of March from Ksh.1.7 trillion in December of 2012.

Revenues at the end of the 2013/14 fiscal year stood at Ksh.1 trillion against expenditures of Ksh.1.3 trillion, the hole has since widened as expenditures in the current year sit at Ksh.2.8 trillion in comparison to Ksh.1.9 trillion in   revenues.

Eurobond craze

External debt contracted to fill the hole over the years has by far incorporated commercial loans which attract higher interest in comparison to alternative means.

Kenya made its inaugural entry to the euro market in June 2014 when it raised Ksh.213 billion ($2 billion) in its first issue. The sale was quickly followed up with a Ksh.80 billion ($750 million) tap sale in December of the same year.

The issue was followed up in 2018 and 2019 with twin bonds which raised a combined Ksh.436.7 billion ($4.1 billion).

In between time, the government shored up its appetite for debt with syndicated loans worth Ksh.239.6 billion ($2.25 billion) with part of the funds acquired serving a refinancing purpose.

According to data from the International Monetary Fund (IMF), one third of Kenya’s Ksh.3.2 trillion external debt stock is now commercial. At the end of 2012, commercial debt to external creditors made up for a mere Ksh.58.9 billion, today, the stock is up to Ksh.1 trillion.

Commercial debt attracts higher interest rates and has packed the pressure on debt servicing.

At the end of 2019, the country’s debt servicing ratio to revenues showed the pressure as it stood at 45.2 percent from 29.9 percent in 2013 breaching the 30 percent Public Finance Management (PFM) rules.

In essence, 49 cents of each shilling of revenues collected now goes to repay debt.


With the pressure now telling, Treasury Cabinet Secretary Ukur Yatani has moved to restructure debt to ease the pressure on revenues as debt servicing threatens to wipe out funds for recurrent and development expenditures.

Part of the discussions on the table have seen the government seek out a moratorium on payments to save on funds in the middle of the pandemic even as Treasury seeks out new loans to the tune of Ksh.823.2 billion in the next financial year.

The IMF which raised Kenya’s debt distress profile from high to moderate this week however sees a slowdown in new credit to Kenya as investors’ factor in higher credit risks from Kenya’s emerging refinancing risks.

“Staff expect that with the international capital markets effectively closed for most emerging markets and frontier borrowers, Kenya could face an external financing gap of up to Ksh.221.8 billion ($2.1 billion),” the IMF noted in its country report published on Tuesday.

Last week, Kenya earned a negative rating on its outlook for future debt issues from the Moody’s Investor Service to hint future expensive loans from the external market.

Genghis Capital Senior Research Analyst Churchill Ogutu believes while debt forgiveness may still be tenable, repayments will still show up in the near term and add to the distress.

“We will actually be burdening future budgets by kicking the can down the road with regards to obtaining a moratorium on debt repayments today,” he said.

Both the National Treasury and IMF reckon Kenya’s debt is sustainable even as opinion differs on the definition of sustainability.

“We will be digging ourselves deeper into the grave by contracting new debt on expected higher interest rates. For sure, there would be no sought of sustainability when half your Gross Domestic Product (GDP) is being financed by debt,” said Cytonn Investment analyst David Ngugi.

The country’s deteriorating credit risk has dragged down the score of top lenders in the country including Equity Bank, Cooperative and KCB owing to their large stocks of government securities.

Pressed hard by debt, multiple sources now indicate the National Treasury s ready to turn inwards to find some breathing room to include restructuring domestic debt which at present account for 49 percent of the debt stock or an equivalent Ksh.3.1 trillion.

The Actuarial Society of Kenya (TASK) has presented proposals to freeze interest payments to pension funds for the next two years in a means to free up Ksh.120 billion in cash to government.

The proposal has attracted objection by pension trustees as they decry a loss in cash for their businesses. Other observers of the move have called out the potential implementation of the move as a technical default on debt by government.

Even so, Kenya Bankers Association (KBA) Director of Research and Policy Jared Osoro believes the government would still retain its risk-free status.

“Rollovers are typically part of government’s debt management strategies. Sovereign investments would still be viewed as those of a better risk,” he said.

Treasury CS Yatani will from July 1 seek out in excess of Ksh.307 billion in project loans to fund the next budget even as the ministry seeks relief and emergency loans from the same parties today.


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