Now debt refinancing puts Treasury in a tight corner
SEE ALSO :Governor Mandago hits out at TreasuryHowever, refinancing the entire debt increases the risk of having little to invest in productive sectors that boost the economy and the ability to pay. Kenya’s current domestic debt stands at Sh2.55 trillion while foreign debt stands at Sh2.60 trillion. The biggest risk is that the Government intends to roll over and amortise Sh470 billion this year to avoid borrowing more than Sh1 trillion as several debts, including the Eurobonds, mature. An amortised bond is where the debt is paid down regularly along with its interest expense over the life of the bond instead of waiting for the redemption of the whole principal amount at the end of the tenure. Rolling over is extending a maturing debt into a new one by either borrowing additional funds to buy a present debt or getting holders of the present debt to extend it. However, this is not guaranteed as Treasury Cabinet Secretary Henry Rotich learned in October 2017 when a Sh77 billion syndicated loan matured.
SEE ALSO :Sh6.5b hospital 'delayed' by StateWhen Kenya failed to pay and sought to refinance or roll over, some creditors refused to roll over some $103 million (Sh10.6 billion), forcing Treasury to turn to Trade Development Bank (TDB) to help settle the loan. Treasury took a Sh77 billion loan from TDB which matures over seven years. The loan would also be paid semi-annually so that the government is not under pressure to settle one big bullet payment. This, however, came at a cost as Treasury paid an interest rate of 6.7 per cent plus a six-month libor (1.87 per cent) and a facility fee of three per cent for the seven-year loan. The loan also attracted a $20,000 (Sh2 million) facility agency fee annually. The refinanced loan, which elapsed due to prolonged negotiations attracted additional charges of 0.15 per cent (Sh97 million or $969,300) for the six-month roll-over to April year despite the extension having been included in the contract. Refinancing is still not guaranteed this time. “There are significant external debt maturities, above Sh200 billion ($2 billion) which are due in first half of 2019 and although measures are agreed to refinancing, there is an added layer of uncertainties in the event of a delay or failure to secure refinancing,” said Genghis Capital research analyst Churchill Ogutu. Mr Ogutu said that if Kenya fails to secure rollovers, the worst case scenarios will dent confidence in the Kenyan shilling as foreign reserve exchange will be utilised to honour the external debt obligations. In the ideal, debt ought to pay for itself from investments but in practice, this is rarely the case. It is hoped that through infrastructure development, the economy will get a boom that will generate enough resources to pay up. However, infrastructure like other capital intensive investments has a long payback period say 20 years plus depending on the nature of the investment. This means that in the short run money to pay for their loans will have to come from somewhere else. But where? As the debt piles up, the government has also slowed down funding development project that could generate revenues to fund debt payment. For a long time the government has been insisting that debt is going to infrastructure hence it will generate returns to pay back. But that has changed. Treasury has muffled spending on development while using borrowed cash from Peter to pay Paul. Treasury has spent Sh415 billion to pay salaries, administration and another recurrent spending, Sh370.8 billion on repaying debt and pensions and only Sh116 billion on development. “It is arguable as to whether these investments are going into infrastructure development as a significant portion (approximately 30 per cent is used to finance recurrent expenditure (wages and salaries, interest payments etc),” said D’souza. The austerity measures have even been extended to counties where Council of Governors Chairman Wycliffe Oparanya blamed Treasury for making it hard for counties to spend on development. In the first months of a financial year, he said, the budget line on development spending in the Integrated Financial Management Information System (Ifmis) is normally closed. “At this time, Treasury is only releasing money according to wages. You can’t divert money to anything else because you have to pay salaries,” Oparanya told Financial Standard on the phone when contacted for comment. He said this was Treasury’s ways of containing spending. “It’s like we are like being micro-managed from Nairobi,” said Oparanya, noting that when development lines are closed, counties can only pay pending bills from previous financial years which is done through “auto-creation.” Funding development has now been left to development partners who fund projects outside the debt juggling treasury that seems to be only interested in avoiding default. “Most capital intensive infrastructure developments are financed partially by development partners such as the World Bank or African Development Bank or through partial concessional financing rather than purely domestic financing,” D’souza said.
We are undertaking a survey to help us improve our content for you. This will only take 1 minute of your time, please give us your feedback by clicking HERE. All responses will be confidential.