Big appetite for loans could dash Kenya’s debt relief hope

African governments have rapidly increased their debt sine 2009.

The costly Eurobonds and multiple Chinese loans have come back to haunt the Jubilee government in the wake of the coronavirus pandemic.

The International Monetary Fund (IMF) yesterday approved debt payment relief to 25 poor member countries, even as it emerged that Kenya and other ‘rich’ countries that have been borrowing expensively from the open market will have to wait longer for much-needed waivers.

A deal on debt waivers on commercial loans, which include Eurobonds and some Chinese loans that Kenya has in the past snapped up with abandon, an IMF source said, is far from being firmed up.

The source, who is close to the ongoing debt restructuring, did not want their name revealed as they are not authorised to speak to the press.

Kenya has been pushing for debt relief to free up cash to boost the country’s health system and cushion vulnerable populations from the adverse effects of the pandemic.

This complicates the country’s financial position to meet its commercial debt obligation, which is set to fall due before June. 

Fortunately, Kenya might feature in another programme that is expected to benefit low middle-income countries through a debt stand-still by bilateral lenders under the umbrella of the G20, a club of 20 rich countries.

The IMF source told The Standard that an announcement on a debt moratorium on bilateral debt will come out “in the near future”.

However, The Standard understands that discussions on commercial loans – extended at market rates, including debt from Eurobonds and syndicated loans – are far from being finalised.

“For commercial loans, I can’t say which mechanism is being used. What is clearer is the bilateral borrowing,” said the source.

Crippling effects

Kenya is expected to save $675 million (Sh71.5 billion) in case of a suspension of debt payments by official bilateral creditors, according to the World Bank.

The World Bank has said such a debt moratorium would immediately inject liquidity and enlarge the fiscal space for governments.

“A debt moratorium granted by official creditors to Angola represents $4.1 billion (4 per cent of GDP), while the resources released for Kenya would total $675 million (0.8 per cent of GDP) if the suspension of debt payments comes from official bilateral creditors,” said the global lender in its Africa’s Pulse report.

The report also projected that the region’s economy will plunge into a recession for the first time in 25 years. In a move to address the crippling effects of the coronavirus pandemic, the IMF’s Executive Board, the fund’s highest decision-making organ, immediately put the debt service for several countries on ice for at least six months.

The countries are expected to use the money they will save to boost their health systems and help feed vulnerable populations.

IMF Managing Director Kristalina Georgieva said in a statement the debt forgiveness was given under the bank’s revamped Catastrophe Containment and Relief Trust (CCRT), with the lender responding to distress calls from a number of its member countries whose economies have been ravaged by the Covid-19 pandemic.

“This provides grants to our poorest and most vulnerable members to cover their IMF debt obligations for an initial phase over the next six months and will help them channel more of their scarce financial resources towards vital emergency medical and other relief efforts,” she said. 

Debt mix

Most of the beneficiaries of were African countries as the global lender moves to contain the effects of the coronavirus pandemic, which it expects to wipe out a staggering Sh900 trillion from the global economy this year.

The countries that have benefited from the debt service relief include Afghanistan, Benin, Burkina Faso, Central African Republic and Chad.

Comoros, DR Congo, The Gambia, Guinea, Guinea-Bissau, Haiti, Liberia and Madagascar will also take a breather on debt repayment up to October as they grapple with the pandemic that has collapsed financial markets.

However, Kenya, which is classified as a middle-income country, will have to wait longer. The headache for policymakers negotiating the restructuring of Kenya’s debt mix is the domination of commercial loans given by pension funds and other private investors.

There are fears that the same way that these investors have been quick to evacuate their portfolio investments, including stocks and debt securities from emerging markets, they may not be at ease rescheduling their loans.

Ideally, faced with this situation, Kenya would have borrowed by either issuing another sovereign bond or borrowing from a group of banks to repay the loans, but times are different. Global financial markets have nearly collapsed.

Kenya became hooked to the expensive loans after it re-evaluated its economy in 2015 and became a middle-income country.

As a result, the country found itself missing out on cheap loans from Bretton Woods institutions like the World Bank and the IMF, as these are preserved for least developed countries.

While the expensive loans from banks and international capital markets have led to more roads, bridges, airports and railways, the economic returns from this infrastructure have not come in as fast as repayment dates.

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