World Bank warns of fresh risks in State's borrowing plan

Treasury Cabinet Secretary Njuguna Ndung'u. [Edward Kiplimo, Standard]

The World Bank has warned of fresh risks in Kenya's domestic borrowing plan. 

In a new report, the Bretton Woods institution appears to suggest it is important for the government to cut reliance on domestic debt, which has the inherent risks of crowding out the private sector.

This happens by limiting credit and fuelling higher interest rates, making it more expensive for companies and individuals to borrow. 

Consequently, the World Bank has signalled it is imperative for countries like Kenya with huge debt profiles such as the maturing Sh292 billion Eurobond to cast their nets wider for alternative and additional sources of international financing. 

"Several countries, including Angola, Ghana, and Kenya, issued Eurobonds in 2021 and early 2022, representing significant refinancing risks for large redemptions," said the Word Bank in a new report published earlier this week. 

"In many cases, reprofiling of debt more toward international creditors is a deliberate and well-
founded strategy to reduce debt service costs and reduce the domestic distortions from debt 
financing." 

The National Treasury has warned the government's headroom for more public borrowing is narrowing.

Treasury Cabinet Secretary Njuguna Ndung'u said recently this is compounded by lower-than-expected revenues, which could impact the government's ability to deliver on its ambitious campaign pledges. 

"The economy faces two extreme constraints: financing constraints as tax revenues generated cannot finance the development we wish to have, and on the other extreme we have limited headroom for debt," he said. 

"We are choked with inherited debt that must be paid."  Experts have pointed out that Kenya faces a risk of commercial banks cutting lending to the economy because they are increasingly buying into government bonds. 

Rising borrowing costs and tougher market conditions could mean that the government will struggle to refinance upcoming maturing debt, the World Bank has warned in the past. 

This is against a backdrop of Kenya's weaker credit rating by global rating agencies, signalling taxpayers will have to fork out more to service the planned borrowing amid tighter global market conditions.   

Global ratings agency Fitch recently also downgraded the country’s credit rating outlook, dimming chances of tapping cheap credit on the international market. 

A credit rating or outlook cut is significant because it may influence a country’s cost of borrowing in the international financial markets. 

This means President William Ruto's regime may have to hike taxes, cut spending or seek costly external commercial loans amid the ongoing economic crisis.

“Overall public debt remains sustainable; however, risks persist,” said the World Bank in its latest regular Kenya Economic update released in June.  

The World Bank singled out the $2 billion (Sh290 billion) bullet repayment. 

“The upcoming bullet payment of previous commercial loans (Eurobond repayment due in 2024) has created a surge in refinancing risks as the cost of borrowing in the external financial market rises,” said the World Bank.  

Refinancing risk refers to the possibility that a borrower will not be able to replace a debt of obligation with suitable new debt at a critical point. 

President Ruto’s revenue plan is also yet to gain momentum as tax collection in the just-ended financial year fell short of the government's target. 

This has dealt a major blow to the President’s efforts to fund his costly campaign promises and repay mounting public debt at a time when additional taxes are stoking public anger amid a high cost of living.