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Kenya’s debt service obligations second highest in Africa, says Afdb

By Dominic Omondi | July 9th 2020 at 00:00:00 GMT +0300

Kenya’s debt service obligations have risen sharply to become the second-highest in Africa after Ethiopia, a new report shows.

The report dubbed African Development Outlook 2020 by the African Development Bank (AfDB) has however vouched for Kenya’s economy to be less hurt by the Covid-19 pandemic due to its diversified nature.

AfDB has projected the country’s Gross Domestic Product (GDP) to expand by 1.4 per cent, a more optimistic projection than the International Monetary Fund (IMF) projection of negative 0.3 per cent.

The World Bank has projected a growth of 1.5 per cent in the best-case-scenario, -1 per cent in the worst-case-scenario.

However, Kenyan authorities expect the economy to grow by around 2.5 per cent this year. But the pandemic has aggravated Kenya’s debt vulnerabilities with the country paying Sh20 for every Sh100 it earns from its exports.

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Ethiopia’s external debt payment as a share of export earnings is the highest in Africa at 25 per cent.

Containment measures aimed at curbing the spread of viral disease in Europe and North America has seen the country earn less from its main export products including flowers, tea and coffee.

Revenue from exports, the country’s main foreign exchange earner, are essential indicators of a country’s capability to service its external debts.

The debt is mostly denominated in foreign currencies. Besides export earnings, a decline in diaspora remittances and tourism earnings also denies the country foreign exchange, critical for payment of external debt most of which is denominated in dollars.

Foreign direct investments also play a part in replenishing Kenya's foreign exchange reserves.

“High debt service obligations mean the government will face difficult trade-offs during the crisis: whether to honour debt obligations or spend domestically to contain and cushion the impacts of the Covid–19 pandemics,” reads part of the report by AfDB.

It adds that “the debt service moratorium granted by the African Development Bank and other multilateral creditors is essential to reconcile the dilemma while dealing with the outbreak.”

Kenya, which has not benefited from these debt moratorium, has however dithered from taking up one offered by G-20, a club of rich countries, fearing that such a move would affect its credit rating.

“The big push for infrastructure investments amid delayed returns notably in terms of exports has also contributed to a deterioration in debt sustainability as illustrated by Djibouti, Ethiopia and Kenya?.”

Afdb noted that the shift by most African countries towards expensive commercial, foreign currency denominated debt, such as Eurobonds, only made things worse for countries such as Kenya which have been binge-borrowing non-concessional loans from private banks and international capital markets.

A new report by Moody’s, a global rating agency, shows that liquidity risks elevated for those governments like Kenya’s with sizeable payments to private-sector creditors this year and next.

“Even for those with reliable access to financing, it will be challenging for most to meet their financial needs at affordable rates," the report says.

"As a result, already weakening debt-affordability metrics (interest/revenue) from falling revenue will be even weaker given higher cost of debt this year, particularly in Angola, Nigeria and Kenya.”

However, things might have started getting better for Kenya after export earnings and remittances in May and June started to improve, official data shows.

Moreover, the flow of cheap loans from the IMF, the World Bank, Afdb and other donor partners, has pushed the country’s foreign exchange reserves to an 11-month high.

Kenya’s risk to debt distress, probability of defaulting, has been reclassified to high from moderate by the IMF, following the adverse effects of the pandemic.

However, Kenya is among the countries in Africa that are expected to escape the dire effects of Covid-19 pandemic due to its diversified economy.

African Development Outlook 2020 African Development Bank Public debt
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