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Kenya to save at least Sh71 billion as G-20 suspends debt payment to end of 2020

THE STANDARD INSIDER
By Dominic Omondi | April 18th 2020

Kenya’s efforts to combat coronavirus pandemic received another boost after the G20, a club of rich countries, agreed to freeze loan repayments by developing countries.

The country will save at least Sh71 billion from the debt service suspension, which is expected to be used to boost its health system and cushion the vulnerable population.

On Wednesday, the G20 agreed to the debt moratorium and requested private creditors to also participate in the initiative on comparable terms.

National Treasury Cabinet Secretary Ukur Yatani had a day earlier tabled a mini-budget in Parliament which contained a raft of expenditure changes, among them a reduction in external debt redemption by Sh29 billion for the current financial year ending June.  

A category of external debt classified as ‘New Loans 1’ registered the biggest drop in interest payment of Sh40 billion. This huge reduction left Treasury with more funds to speed up payment of interest for last year’s Sh210 billion Eurobond the country was to start servicing after the current financial year.  

Inadequate forex

Repayment of China’s Sh33.6 billion for the Standard Gauge Railway that was to be made before end of June was slashed by Sh10.5 billion, with the country now expected to pay Exim Bank of China Sh23 billion.  

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

This offers Kenya, which has seen its foreign exchange (forex) reserves dwindle as investors evacuate their money from the economy and earnings from exports and tourism decline, a reprieve.

Without adequate forex, the country would struggle to pay its foreign debts, most of which are in dollars.

The moratorium on bilateral government debt repayments will begin on May 1. It will apply to the 76 countries eligible to receive assistance from the World Bank’s International Development Association, which works with the poorest countries, as well as all nations defined as least developed by the United Nations.

In addition to the freeze, the G20 also wants private creditors to voluntarily waive debt service for low-income countries, including Kenya, which have been hooked to the Eurobond market.

“Considering the speed, the spread and the severity of Covid-19 . . . this requires a very strong, bold and significant action by the G20 and by the world,” said Mohammed al-Jadaan, finance minister of Saudi Arabia - which is currently chairing the G20 - as quoted by Finance Times.

A deal on debt waivers on commercial loans - which include eurobonds, dollar-denominated sovereign bonds which Kenya has in the past snapped up with abandon - is far from being firmed up, a source at the International Monetary Fund (IMF) said.

This complicates the country’s financial position to meet its commercial debt obligation that will fall due before June. 

Before the end of the current financial year, Kenya is expected to pay Sh67.3 billion in interest to private investors including Eurobond holders and commercial banks.

Principal payments will amount to Sh27.1 billion.

At the beginning of the week, the IMF approved debt payment relief to 25 poor member countries, even as it emerged that Kenya and other countries that have been borrowing expensively from the open market will have to wait longer for much-needed waivers.

In a move to address the crippling effects of the coronavirus pandemic, the IMF’s Executive Board, its highest decision-making organ, immediately put the debt service for the poorest countries on ice for at least six months.

Pension funds

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

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 private sector loans, but times are different.

Global financial markets have nearly collapsed. Revenues are also doing badly as the economy comes to a standstill. 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 institutions such as 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 thede infrastructure have not come in as fast as repayment dates.

According to an IMF source close to the ongoing debt restructuring who did not want their name revealed as they are not authorised to speak to the press, discussion on a moratorium on commercial loans was not clear.

Kenya has been pushing for debt relief to free up cash to boost its health system and cushion citizens from the adverse effects of the pandemic.

President Uhuru Kenyatta, in his address to the nation on Thursday, alluded to the suspension of the debt service by rich countries as one of the means to help with economic recovery.

“The countries with the largest economies in the world are in discussion with ourselves on the issue of suspension of debt in order to allow countries to be able to spend more in combating this pandemic,” he said, noting that the money would also be used in economic recovery efforts.

The source at the IMF said discussions on commercial loans – extended at market rates, including 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.

The World Bank has said the debt moratorium from rich countri es would immediately inject liquidity and enlarge the fiscal space for governments.

“A debt moratorium granted by official creditors to Angola represents $4.1 billion (four 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 released last week.

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