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NEWS & CURRENT AFFAIRS

The Nairobian

More burden as Eurobond pushes up loan repayment in December to Sh67 billion

News

By Paul Wafula | Dec 06, 2015

**Treasury building decorated for budget day on 11/06/15 PHOTO: JENIPHER WACHIE**

The burden of the multi-billion shilling Eurobond Kenya issued last year on the taxpayer will be more felt this December when the Treasury makes interest payments. The National Treasury is expected to service Sh9 billion as interest payment for the dollar denominated Eurobond.

This is expected to push loan repayment this month to Sh67 billion in what now makes debt one of the biggest cost items for the cash strapped country. Kenya borrowed $2.75 billion (Sh269.5 billion) through the Eurobond in two tranches — the first tranche of $2 billion in June last year and $750 million in December.

A research note by Cytonn Investments, an investment firm, shows Kenya's borrowing plan is running ahead of schedule after the government resorted to short term loans from the domestic market. The report says the Government's borrowing programme for the current fiscal year, targeted Sh219 billion, has been stepped up, having borrowed Sh105 billion for the current fiscal year compared to a target of about Sh91.3 billion assuming a pro-rated borrowing throughout the financial year.

"However, given that the Government has resorted to funding the budget through short-term borrowings, which mature within the current fiscal year, we expect the aggressive borrowing to continue, as pressure remains to refinance their obligations within this fiscal year," the report to investors reads in part.

But it is the maturity of the Eurobond this month that is set to see the Treasury dig deeper into taxpayer's money to service the ballooning debt that the government has been taking up to plug the budget shortfall and fund infrastructure projects. This month alone, the report says, total government debt maturities stand at Sh58 billion. This is without taking into account the dollar denominated Eurobond interest payment of Sh9 billion, which brings total debt due in December alone to Sh67 billion.

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This is set to worsen come next month given that in January 2016, the figure is much higher at Sh86 billion.

Public debt has soared 60 per cent to almost Sh3 trillion since President Uhuru Kenyatta took office only 30 months ago. It is a borrowing spree that has seen debt rise by an average of Sh40 billion every month.

This works out to the State borrowing Sh1.3 billion a day, about Sh1 million a minute, or Sh15,432 every second. But the struggling Kenya Revenue Authority (KRA) to meet revenue targets, has left the government with difficult options of raising taxes or borrowing. The government is doing both.

Treasury, which has defended the country's debt sustainability strategy, laid the ground for the current borrowing spree two years ago after it asked Parliament to approve its external borrowing limit by an additional Sh1.3 trillion. Recent data shows the country's total public and publicly guaranteed debt stood at Sh2.934 trillion, or 51.29 per cent of GDP at the end of August.

This is 60 per cent, or Sh1.1 trillion, more than the Sh1.8 trillion that President Uhuru's regime inherited from the Grand Coalition government of Mwai Kibaki and Raila Odinga.

At Sh1.1 trillion, the current regime has borrowed more in three years than any previous government did in 10 years. Out of the Sh2.9 trillion debt as at the end of August, the domestic market accounted for 48.1 per cent of this, falling from 49.95 per cent at the end of June.

Central Bank data shows the government borrowed Sh97.71 billion between October 16 and November 27, 2015. During this period, domestic debt rose to Sh1.485 trillion from Sh1.387 billion.

Inflation, which in this fiscal year remained low is steadily approaching the Central Bank of Kenya (CBK ) upper limit of 7.5 per cent, and given the high liquidity in the money market and the El-Nino rains, inflation may surpass this limit.

"All these factors point to an eventual rate spike in the near future, and we are of the view that the current decline in interest rates is not sustainable," the report notes.

This has seen analysts warn of uncertainties in the interest rates regime in the country. "We maintain our view that investors should be biased towards short-term fixed income instruments given the uncertainty in the interest rate environment," said Cytonn Investments.

The first warning signs on Kenya's debt management under the current administration came to the fore last year when the country started experiencing 'temporary delays' in servicing the debt. The external arrears reported between July 2014 and March 2015 accumulated to around Sh6.5 billion.

This was blamed on capacity constraints at National Treasury's Debt Management Office (DMO). This saw the IMF push the government to adopt a 'pre-emptive approach' to process debt repayments. Kenya will now rely on its reporting systems, rather than on invoices from lenders, to start processing debt.

The payment process will start 30 days before the due date, to allow for internal approvals by the Treasury and Controller of Budget, and timely settlement by CBK. Staffing at the DMO will also be strengthened.