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‘Kenya’s stock-pile of commercial loans risky’

By Dominic Omondi | June 17th 2016

A huge chunk of Kenya’s debt comprises expensive commercial loans which attract higher interest rates and have shorter repayment periods, thus putting the country at risk.

According to an economist with Bloomberg Mark Bohlund, Kenya needs to reduce its appetite for high-yielding loans from the domestic markets as its repayment will place a heavy burden on the taxpayers.

The situation is different in the case of Tanzania whose debt to gross domestic product (GDP) ratio is almost at par with Kenya’s. Both countries have a debt to GDP ratio that is slightly over 50 per cent. “If you compare debt to GDP, Tanzania and Kenya are quite similar but Tanzania for a long time did not borrow that much from the domestic market. So their debt is mostly concessional debt from governments, which means it is long-term and attracts very low interest,” said the economist who specialises on Sub-Saharan Africa.

Kenya also floated a Eurobond from which it raised about Sh250 billion; it borrowed Sh327 billion from the Chinese for the construction of the Standard Gauge Railway (SGR) bringing the country’s total debt as of December 31 to 2015 to Sh3.16 trillion.

For the 2016-17 financial year, the Government projects a budgetary deficit of Sh691.5 billion in its Sh2.3 trillion budget. To plug this deficit, it plans to borrow Sh225.3 billion from the domestic market and another Sh462.3 billion from the external market.

However, Bohlund noted that Kenyans can take solace in the fact that borrowed money has been put into good use, with most of the money pumped into such infrastructural projects as the SGR which should help the economy grow.

However, in countries such Ghana and Zambia, this has not been the case. In these countries, “borrowed funds have been used to expand the public sector and boost governments’ chances in hotly-contested elections”, he said in one of his monthly reports on Sub-Saharan Africa.

Oil prices

On the expected spike in the prices of crude oil, the economist said Kenya’s shift from fossil fuel to renewable energy sources such as geothermal should cushion it against the expected rally in the global prices of oil.

Thus Kenya will need to import less oil for electricity purposes. “Kenya is now becoming less oil-dependent, which means they will be less vulnerable to increase in the price of oil,” he said.

“East African nations, of which only South Sudan is an oil and gas exporter, are likely to power ahead in the next few years. Ethiopia, Kenya and Tanzania have also invested in domestic power generation and better transport infrastructure —both should pay dividends,” said Bohlund in one of his latest reports.

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