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Kenya must curb borrowing to keep debt affordable, IMF says

By Bloomberg | August 15th 2016

At the rate Kenya is borrowing to fund its spending, the East African nation could accumulate more debt than it can afford to repay comfortably, according to the International Monetary Fund.

While the nation’s current debt stock is sustainable at 49.8 per cent of gross domestic product, the Treasury has at times struggled with cash management because of maturities coming in very close together, Armando Morales, the IMF’s resident representative in Kenya, said during a lecture on the country’s debt.

“At the extreme, if the government continues to accumulate debt at the current rate, it will cross the 50 per cent threshold of sustainability by the year 2024,” he said at the Strathmore University in the capital, Nairobi.

“But we don’t think the government wants this.”

Kenya has historically been below the standard threshold of 50 per cent of the present value of its future debt obligations, according to Morales.

The rise in interest payments was a concern and “something to be watchful about,” he said. “You need to look at not just the rise of debt, but also cost of borrowing.”

While Kenya has been able to borrow at concessional rates of about 1.6 per cent and commercial rates of as low as four per cent, the international markets will start demanding higher returns at some point, Morales said.

The yield on Kenyan Eurobonds maturing in 2024 was at 7.37 per cent.

TheGovernment plans Sh462 billion ($4.57 billion) of net external borrowing in the fiscal year through June 2017 and another Sh225.3 billion from the domestic market to plug its spending shortfall, Treasury Secretary Henry Rotich said in his annual budget speech in June.

“We expect the Government will move to fiscal consolidation in the medium term -- between 2021 and 2035 -- otherwise the future is going to be bleak,” Morales said.

Kenya’s budget deficit is forecast to climb to 9.3 per cent of gross domestic product in the 2106/17 fiscal year starting on July 1, compared to below eight per cent in the current 2015/2016 financial year, a rise which has unnerved investors.

As it sought to raise funds domestically in October and November last year, yields on 91-, 182- and 364-day Treasury bills climbed above 20 per cent, straining state coffers and hitting commercial bank borrowers and companies.

Morales said from July 1, Kenya would have a better cushion of domestic funds that had already been raised - more than Sh200 billion- easing some pressure on government finances in the next fiscal year.

“That is a positive development and it gives the government some room to feel that financing is not going to be tight.”— Additional report by Reuters

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