It may be time for Treasury mandarins to seriously consider learning the art of submission.
Senior State officials, led by National Treasury Cabinet Secretary Ukur Yatani, have their work cut out for them as they prepare to convince China to offer Kenya a debt repayment holiday.
The Asian nation is Kenya’s leading bilateral lender, having advanced close to Sh736 billion in loans to build railways, roads, ports and other infrastructure.
But, unlike other rich nations that have agreed to give Kenya some breathing space on debt repayment, China still expects to be paid close to Sh55 billion in the next six months.
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This is a tall order for a country that is grappling with dwindling revenues as the economy is ravaged by the Covid-19 pandemic.
On its knees
As a result, Kenya is officially on its knees, begging for debt forgiveness or a debt moratorium from its major creditors.
On Tuesday, Germany, France, South Korea, Denmark, Italy, USA, Belgium, Spain, Canada and Japan – under the Paris Club – agreed to step in.
And while their offer blunts the pain of loan repayments, getting China to sign on would be the real deal.
The Paris Club deal freezes the repayment of loans valued at Sh32.9 billion.
However, the country has a debt-servicing burden of external loans over the next six months of more than Sh145.9 billion.
Yet, negotiations with China are shrouded in secrecy as Beijing prefers to deal with individual countries unlike the Paris Club.
In April last year, G20 nations agreed to suspend debt payment for poor nations for six months, and then extended this for another six months under the Debt Service Suspension Initiative (DSSI).
“China has played hardball in debt relief talks so far, insisting that loans from state-owned banks should be treated as commercial debt and not subject to the G20’s earlier debt relief initiative (the DSSI),” said William Jackson, the chief emerging economist at Capital Economics, a London-based economic research consultancy.
Chinese banks – Exim Bank of China and China Development Bank – have taken varying approaches to dealing with repayment suspensions or modification requests in light of the coronavirus crisis.
Only two African countries, Angola and Zambia, have so far secured debt relief from China. Yatani has confirmed that Kenya is in talks with the giant economy to secure a deal.
By January 21, Kenya is expected to start repaying the Sh162 billion it borrowed from China to build the Nairobi-Naivasha Standard Gauge Railway.
The loan, which is supposed to repaid in 30 equal instalments until 2035, adds to the Sh392.8 billion loan for the first phase of the SGR from Mombasa to Nairobi that is already being serviced.
Other major Chinese-funded projects whose loans are already being repaid include the Nairobi Southern, Eastern and Northern bypasses, and the Nairobi-Thika Highway.
Even before Kenya received its first debt relief offer from the Paris Club, the Treasury had said in one of its reports that it planned to engage “creditor nations and multilateral institutions to secure debt servicing moratorium and debt cancellations to free up resources”.
This was aimed at disentangling the country from financial constraints that have seen it delay disbursing funds to the 47 counties.
As it is, the economy is in a tight spot, with about 3.3 million people unemployed at the end of September last year, compared to pre-Covid levels of 2.9 million, according to official data. Further, critical pillars are faltering.
The hospitality industry, for instance, is yet to find its footing as foreign tourists fail to venture beyond their homes, let alone their countries.
This has reduced the country’s foreign exchange reserves, which are critical for repaying external loans.
Credit rating company Moody’s, in its latest outlook for sub-Saharan Africa (SSA) countries, notes that: “We expect global tourism to remain muted until the second half of 2021, causing lower than historical growth of five per cent in Kenya, 4.6 per cent in Tanzania and 2.4 per cent in Namibia.”
Moody’s has since cited Kenya’s elevated debt vulnerabilities as the reason for rating its credit outlook at negative, meaning the country’s rating could be downgraded to junk – or into the default zone.
It has further warned that Kenya is the fifth-likeliest SSA nation to default after Zambia (which has already defaulted on a bond issued to foreign investors), Ghana, Namibia and South Africa.
Mohamed Wehliye, an economist, downplayed the impact of the Paris Club’s six-month reprieve, describing it as “just a painkiller” that does not cure the underlying problems.
“For immediate liquidity needs. It does not address debt sustainability problems. Next step is debt restructuring (a must). And that will require debt sustainability analysis (DSA) by IMF & straight to their ICU,” said Wehliye in a tweet.
Indeed, in most of its documents, the Treasury has talked of undertaking a debt restructuring plan that will include replacing its many short-term domestic loans with long-term ones.
“This will ease fiscal pressure from expensive commercial debt servicing and decrease issuance of shorter-dated domestic government paper to refinancing risk and the public debt burden,” said the Treasury in its Post-Covid-19 Recovery Strategy.
But with the urgency of repaying external loans as they fall due, institutions like the World Bank and International Monetary Fund reckon that Kenya needs a “painkiller” to ease the pain.
However, the Moody’s report warns: “China’s past willingness to offer relief provides scant visibility regarding when or how much it might be willing to offer in the future and the ultimate implications for private creditors of SSA sovereigns, given the opaque nature of lending terms and conditions and subsequent negotiations.”
Kenya’s public debt has already touched a high of Sh8.4 trillion and is quickly racing towards the Sh9 trillion ceiling.
This is slightly over three-quarters of the country’s total economic output, or gross domestic product (GDP).
And if the government goes ahead to classify non-guaranteed and county loans, as well as other contingent liabilities, as public debt, then the Sh9 trillion ceiling will be surpassed.
Already, there are reports of raising the ceiling to Sh12 trillion to give the State more room to borrow.