Parliament lifts the lid on opaque loan terms as Kenya debt spikes

Treasury Cabinet Secretary Njuguna Ndung'u. [Elvis Ogina, Standard] Parliament has revealed that opaque terms in State loans are pushing Kenya towards a debt crisis. An investigation by the Public Debt and Privatisation Committee seen by Financial Standard found that Kenyan taxpayers are bearing a significant burden of hidden fees and costs in State loans, amounting to billions of shillings annually. The report highlights the cryptic and opaque fee structures used by Kenya's creditors, which obscure the terms of many State loans. It also points to a perceived lack of due diligence by some National Treasury officials during negotiations for some of the loans. The Parliamentary committee chaired by Balambala MP Abdi Shurie assessed loans accrued by the government between last year and the first half of this year. Borrowing headroom The report's findings come as Kenya confronts a debt crisis, with the National Treasury warning that the country's headroom for more public borrowing is narrowing. "The loans contain certain financial terms that might hide the true cost of a loan," said the parliamentary committee in its findings published recently. "Such terms include: lending margins, commitment fees, front-end fees, maturity premiums, service fees, and commitment charges; and, the information provided does not include specifics such as project outputs, activities, and implementation period (single or multiple-year projects)." Treasury Cabinet Secretary Njuguna Ndung'u said the debt crisis is compounded by lower-than-expected revenues which could impact the government's ability to deliver on its ambitious bottom-up promises. "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 earlier. "We are choked with inherited debt that must be paid." Financial Standard could not immediately reach Treasury for comment for this article. According to the report, the Treasury in its submissions to Parliament said "charges on loans vary from lender to lender based on the lending policy." "Most lenders charge various fees as part of the loan cost, in addition to interest charges and principal repayments such as lending margins, and charge fees as part of their lending policy," it said. According to the report, an example of such debt is a Sh10.52 billion loan signed on August 22 last year and financed by the African Development Bank. The loan was targeted at general budget support for post-Covid-19 pandemic economic recovery through "enhancing fiscal performance, strengthening industrial development and competitiveness, and promoting economic and social inclusion through support to SMEs." Kenyan taxpayers are bearing a significant burden of hidden fees and costs in State loans. [iStockphoto] "It is worth noting that there is no specific interest rate indicated for this loan. "The interest rate provided is a percentage rate per annum equal to a floating base rate, funding cost margin, lending margin, and maturity premium of 10 basis points," says the committee report. "This interest rate is based on pure variables that change or fluctuate based on financial status or economic impact on the Euro. Such loans are likely to promote uncertainty in debt servicing expenditure." The committee also raised concerns regarding a loan of Sh2.59 billion that was signed on June 2, 2022, and financed by the International Fund for Agricultural Development. The loan is concessional with a 9.5-year grace period and Euro repayment instalments scheduled to commence in 2032 and 2042. Irregular approach Despite being signed in June 2022, the committee said less than one per cent of the loan has been disbursed, and no information has been provided regarding the intended use of these resources or their expected impact on undisbursed balances. The committee has noted that this indicates an "inefficient" supply of financial resources and an "irregular approach" to enabling timely project implementation. Currently, Kenya is in negotiations with the International Monetary Fund for further financial support, Central Bank of Kenya Governor Kamau Thugge said recently. The country's high levels of debt have made it challenging to borrow from international financial markets at affordable rates, experts say. The economy is struggling with high inflation, a weak currency, and slow growth, but the government says it is committed to avoiding a debt default.

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