Treasury panics as expensive loans push country to the cliff

State admits in its recent public debt management report that things have hardened for Kenya, even as IMF found that the country’s chances of defaulting had increased.
For the young full of life, ‘death’ is but a distant thought.

But as one ages, thoughts of death move to the conscious before finding a permanent place on the lips. “I am not about to die,” you hear them say as if by merely denying it, they will stop the hands of time.

For long, Kenya has been like that healthy youth, bothered less by talks of debt distress.

And just as the youth who won’t entertain thoughts of death, the word ‘defaulting’ was never in the ‘dictionary’ of most Treasury honchos.

Slowly but surely, things have started changing. Treasury mandarins have suddenly been belabouring the point: Since independence, Kenya has never defaulted on its debt.

“Our debt limit has been quite sustainable. We have never defaulted on any payment that has fallen due,” said acting Cabinet Secretary Ukur Yatani yesterday.

Suspended Treasury CS Henry Rotich also emphasized on the same in his budget speech in June.

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But their words of valour have been undone by their desperate actions.

Despite the chest-thumping, the Government has frantically tried to ramp up tax revenues while mercilessly slashing spending. It has consolidated as much money as they can to settle debts as they fall due.

In the Financial Year ending June 2019, for every Sh100 that the country earned from taxes, non-tax revenues and grants, Sh57 went into servicing debt.

This compares to only Sh25 Treasury paid six years ago.

The cash-strapped Exchequer has been forced to suspend some development projects, do away with non-essential spendings such as tea, advertisements and travelling, so as not to be at odds with its creditors.

And it has stopped being so cocky about the sustainability of the country’s debt which has risen to 5.8 trillion - or 61.1 per cent of the national output - the gross domestic product (GDP).

The upper limit is 70 per cent. Debt as a fraction of GDP has increased from 42.1 per cent in June 2013. Generally, the higher the country’s debt-to-GDP ratio, the higher the risk of defaulting. It is even worse when most of the debts are in foreign currencies.

That is why starting last year, Treasury began to acknowledge the need to reverse the voracious uptake of expensive external loans, lest it tips over the financial cliff.

Treasury was forced to mellow after their erstwhile cheerleaders, the International Monetary Fund (IMF) and the World Bank, started raising alarm over the country’s rising debt levels.

At the beginning of last year, Kenya, just like Tanzania, vetoed the release of a damning report by the IMF, which said that the country’s risk to default had increased.

By June 2017, relations between Kenya and the Washington-based institution had already gone sour after the country’s debt as a fraction of GDP sped to 60 per cent mark.

As a result, the IMF was forced to discontinue a Sh150 billion stand-by arrangement it had with Kenya unless the country agrees to some measures, including tough spending cuts. With interest and principal payments on costly commercial loans maturing in droves, the IMF, found that Kenya’s chances of defaulting had increased, with the country’s risk of external debt distress moving up from low to moderate.

This is two rungs below debt distress level occupied by Africa’s most notorious fiscal miscreants, such as Mozambique.

In its recent public debt management reports, Treasury has admitted that things have hardened for Kenya.

While the State insists that the reason is due to the country’s upgrade into a lower-middle-income country which saw the flow of cheap loans reserved for poor countries stop coming, fiscal indiscipline is also to blame.

“The maturity and grace period has shortened while average interest rates have risen, reflecting the rise in loans contracted on commercial loans in the external debt portfolio,” said Treasury in the annual public debt management for Financial Year 2018/19.

Expensive dollar-denominated sovereign bonds, Eurobonds, and loans from commercial banks have pushed up the share of the country’s commercial debt, plunging the nation into new risk frontiers.

Although international bond issuances have increased public debt levels, the bigger impact for countries such as Kenya that have borrowed to restructure loans has been on debt composition.

This is according to a new IMF report on the issuance of international bonds by Sub-Saharan African countries.

Another report by the Parliamentary Budget Office (PBO) noted that the use of the Eurobond money for refinancing has increased the overall interest rate cost of the debt portfolio.

By June, interest payments took up 25 per cent of the country’s taxes, gobbling up Sh375.7 billion. This was more than the Sh314 billion the 47 counties received as their equitable share.

Six years ago, interest payments took up 14 per cent of the country’s ordinary revenues. Increased interest payments on public debt, the IMF warned last year, resulting from the country’s rising reliance on non-concessional (expensive) borrowing.

This was the reason the IMF institution downgraded Kenya’s risk profile.

The Bretton Woods institution said that Kenya’s interest payments on the public debt increased to almost one-fifth of the country’s revenue, pushing Kenya up to the top five frontier economies with a higher fraction of interest payment to earnings.

Moreover, issuance of Eurobonds has led to “dollarisation” of public debt - in turn affecting vulnerabilities. About 70 per cent of the country’s Sh3 trillion external debt stock is in dollars.

Even China, whose loan comprises 22 per cent of the external debt, lends Kenya in greenback with only 5.4 per cent of Kenya’s debt being in Yuan, China’s currency.

The dollars and other foreign currencies have to be earned. Kenya’s main foreign exchange earner is exported, though tourism, diaspora remittances, as well as direct and portfolio investments also help shore up the country’s reserve of foreign cash.

A dollar used to repay a foreign investor, is a dollar less for the importation of oil, machines, fertiliser, drugs and other critical commodities.  

In 2017, servicing of public and publicly guaranteed debt as a share of export earnings was 16.5 per cent, against a set threshold of 21 per cent. But with export earnings stagnating against increased commercial debt obligations, this ratio has surged to 26.2 per cent in 2019.   Generally, debt service to revenue ratio has gone bad. The Parliamentary Budget Office report warns that because debt services are “mandatory and non-responsive to revenue shortfall” any shocks, for example arising from the weakening of the Shilling against the dollar, are likely to result in some fiscal pressure.

But Kenyans might also be paying for loans that will never benefit them or their children.

The 2019 IMF report on issuances of international bonds by Sub Saharan African countries, might have an explanation on the use of the country’s debut Eurobond, although the report doesn’t cover the period when Kenya went to the market.

According to the report, because of fungibility of funds - the property of money being interchangeable - proceeds of the bonds issued by most African countries may have been used for other budgetary proceeds, and not necessarily infrastructure.

“Countries that issued international sovereign bonds for infrastructure building did not experience a sizable increase in public investment,” said the report, noting that this might have reflected lower revenue from the subdued domestic activity which leads to delays in implementing projects. Kenyans have never known how the cash from the 2014 Eurobond was used. Questions have also been raised on the quality of debt-funded projects.

There are 545 projects valued at Sh366 billion which have stalled, having already utilised Sh72.5 billion, according to official data. The PBO reckons that the number could be higher.

Some of the completed projects have turned into white elephants, with some critics seeing the Standard Gauge Railway as one of them.

Rail-roading all importers onto the Sh400 billion Standard Gauge Railway (SGR) has been seen as an attempt to give life unto the line, which some critics say would struggle against cut-throat competition from trucks.

With high speed and pricing not working, the Government resorted to coercion.

Incessant protests have forced the Government to go slow on the policy. But that will not stop China from coming for its first instalment of the loan used to construct the SGR in the first half of 2020.

Besides instituting austerity measures and aggressively going after tax evaders, Treasury will also come up with a new debt policy.

“We want to be more pro-active by making sure that we retire all the commercial loans,” said Yatani yesterday. Commercial loans, he noted, have an interest of between eight and nine per cent. They also have shorter grace and maturity periods.

He said they will instead embark on cheap, multilateral loans with an interest rate of less than two per cent. Of the six loans Treasury between May 1 and August 1, four of them were concessional.

Treasury also wants to cap the country’s debt at Sh9 trillion, as opposed to the current way of the debt ceiling that is based on the percentage of GDP.

CS Yatani said this will bring about transparency on debt.  

But there is a drawback to the plan. “Ease of access to commercial debt financing that leads to a “bullish” approach towards the external financial markets,” said the PBO report.

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