Public Debt: Each Kenyan to owe creditors Sh75,000 in two years as debt hits Sh3tr

Cabinet secretary ministry of finance Henry Rotich (left) signs a bilateral agreement between Kenya and Korea at the treasury looking on is Deputy minister for political affairs Lee Kyung Soo.PHOTO BY GEORGE NJUNGE

Debt  to rise from Sh2.22 tr to Sh3 tr in the 2016/2017 financial year due to heavy borrowing

Every Kenyan child born in 2016 will have to shoulder a debt of Sh75 000, as the Government goes on a borrowing overdrive. This is after National Treasury warned that Kenya’s public debt will rise by close to Sh 1trillion over the next two years, to stand at Sh3 trillion in 2016, from the current Sh2.2 trillion.

The meteoric rise in debt will partly be due to heavy borrowing for mega infrastructure projects, with a significant proportion of the loans coming from China. This level of debt could mean that with a population of about 40 million, every Kenyan stands to be indebted to the tune of Sh75, 000.

Treasury through its annual public debt report (2012-2013) has also cautioned that the volume of Government’s borrowing from the domestic market would rise in a similar period, casting doubts on having low interest rates.

lending terms

Treasury also revealed that Kenya will be a disadvantaged borrower, with creditors tightening lending terms. This could mean assessing loans at high interest rates. “Whereas the overall external debt is long term and concessional in nature, there has been hardening of borrowing terms in the recent past,” says report.

According to the report, Kenya’s external debt portfolio consists mainly of multilateral and bilateral creditors at 60.7 per cent and 30.5 per cent respectively. According to the report dated December 2013, Kenya’s overall public debt is expected to climb to Sh2.22 trillion in June 2014 and later jump to Sh3 trillion by the end of the 2016/2017 financial year.

In June last year, the Government owed creditors a total of Sh1.89 trillion. According to the report, the cost to the taxpayers of servicing total debt is projected to increase by three per cent in a similar period. But the National Treasury is upbeat that the debt burden indicators would be within sustainable levels. “Overall debt service is projected to increase by three per cent but as a ratio to GDP, the debt burden indicators will be within sustainable levels,” says report.

The sustainability of the Kenyan debt has also come under focus, after the National Treasury revealed that as a proportion of the gross domestic product (GDP), the public debt in nominal terms was projected to increase to 53.3 per cent by last month, from 51.7 per cent in June last year.

The Government’s strategy is reduce the debt to GDP ratio to below 45 per cent in the medium term, but according to Treasury, this would only decline to 49.6 per cent by June 2017. “For the past three years, total debt in nominal terms has been increasing steadily. In the medium term the Government plans to lower the level of public and publicly guaranteed debt to 45 per cent of GDP,” says National Treasury.

bank loans

Government’s level of domestic borrowing through Treasury Bills and Bonds is expected to increase to 26.1 per cent of the GDP in June 2017, from 23.9 per cent in June 2014, despite the National Treasury’s promise to stay away from local markets. This implies that the dreams of Kenyans accessing cheaper bank loans still remain an illusion. Treasury says the amount of domestic debt is expected to increase to Sh1.38 trillion in June 2016 and eventually peak to Sh1.56 trillion in June 2017.

Comparatively, external debt is set to grow to Sh1.3 trillion and Sh1.41 trillion in a similar period, implying that the Government still has a lot appetite for the domestic market. By June this year, the proportion of external and domestic debt was expected to be Sh1.22 trillion and Sh995.34 billion respectively, according to the report.

The latest comes amid intensified borrowing by the Government from China, with fears that the growing debt could plunge the economy into a debt overhang. Early this month, Treasury signed a framework agreement with the Republic of Korea in a move expected to increase borrowing from the Asian nation.

 Chinese funding

The framework agreement with South Korea will facilitate Kenya’s access to grants from the Asian nation. Two months, ago President Kenyatta brokered a financial deal with  China for funding with  over 50 per cent (Sh174 billion) of the Sh340 billion financial agreements signed with the Chinese Government on May 11, is a commercial loan.

The loan attracts an interest rate of 4.4 per cent per annum for 12 years, though with a reprieve of five years grace period, while the concessional loan carries a fixed interest rate of two per cent per year with a repayment period of 20 years, and grace period of seven years. It is feared that increased borrowing is likely to worsen external debt position.

Treasury has also concluded issuance of $2billion (Sh176 billion) sovereign bond to fund the country’s infrastructural projects. During President Uhuru ‘s visit to China last year, he concluded eight deals worth $5 billion (Sh450 billion) with the Chinese government.