Kenya is broke. The country is under pressure to repay billions of shillings within the next seven months, the shilling is weakening, counties are making demands for money and foreign exchange reserves are at a six-month low.
This comes on the heels of an economy devastated by Covid-19, dampening the avenues available to the government to raise money.
As a result, the Treasury has been forced to tap into the highest amount it has ever borrowed through overdraft facilities from the Central Bank of Kenya, as well as look to multinational donors for a way out.
Fearing the worst, the country has approached the International Monetary Fund (IMF) and World Bank for a Sh400 billion loan, and expects to spend part of the money to repay some of its loans to foreign creditors.
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Already, the IMF has flagged the country as being at high risk of defaulting given the adverse effects of the pandemic on the economy.
“Zambia became the first African government to default during the current crisis and debt risks are high in several other Frontier Markets, including Ghana and Kenya,” said William Jackson, the chief emerging economist at Capital Economics, a London-based economic research consultancy.
However, a debt sustainability analysis done jointly by the World Bank and IMF in May found that although Kenya’s debt position was sustainable - with the country not facing repayment difficulties - the risk of debt distress (default) had increased to “high” due to the pandemic, which weakened export earnings and economic growth.
In an economic update on the country, the World Bank has advised that Kenya cut wasteful spending and operation costs, as well as increase efficiency by leveraging on digitisation.
There is also a push by the lenders to have Kenya reverse tax waivers and concessions to raise revenues. These measures, however, helped ease the damaging effects of the lockdown necessitated by the pandemic on citizens and corporates.
The Treasury had foregone close to Sh200 billion through tax relief measures, which included reducing Value Added Tax (VAT) to 14 per cent from 16 per cent, and reducing Pay As You Earn (PAYE) and corporate income tax to 25 per cent from 30 per cent.
Government officials are now considering reversing these relief measures that helped put more money in businesses and Kenyans' wallets. If it does not cut spending, the Treasury will be forced to borrow to meet its costs.
But as it is, the country’s debt, as Treasury Cabinet Secretary Ukur Yatani has said before, has reached dangerous levels.
The World Bank has asked Kenya to take advantage of debt relief measures to free up liquidity that would otherwise be absorbed by debt service.
But restructuring its loans comes with the risk of downgrading Kenya's credit rating, as rating agencies could interpret such a move as a sign of financial distress.
Yet, times are tough and the country is now grappling with how it will freeze repayment of Sh80 billion owed to several rich countries without jeopardising its credit standing.
Churchill Ogutu, an analyst with Genghis Capital, said Kenya's participation in the debt relief extended by the Group of 20 (G20) would not have any effect on the country’s credit rating as it does not involve private lenders.
But China seems to have thrown the spanner in the works, a situation that has made Kenya dither on taking up the offer.
“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 Jackson.
At high debt distress, Kenya, like 26 other countries, is just one step away from joining Zambia in the default territory.
Glimmer of hope
However, despite the gloom, the Government can take solace in the fact that a chunk of the new debt it is taking includes cheap loans from multilateral institutions, such as the World Bank, IMF and African Development Bank. These loans have a longer repayment grace period and attract low-interest rates.
Kenya is expected to repay close to Sh200 billion to external creditors in the next seven months, according to data from the World Bank.
But without enough forex reserves, the Treasury officials, led by Yatani, have been left scratching their heads.
Part of the Sh250 billion that Kenya will get from the IMF will most likely be used to repay the external loans.
However, the funds will come with some strings attached, including the need for Kenya to implement some belt-tightening measures such as collecting more taxes and restructuring loss-making parastatals.
Kenya also expects to get close to Sh150 billion from the World Bank by the end of the current financial year in June 2021. The money will be used mostly for budgetary support, including shoring up the healthcare system.
In the current financial year, Kenya is expected to borrow more than Sh1 trillion, which would push its debt level to Sh7.6 trillion, or more than 70 per cent of the value of goods produced in the country (GDP).
The Treasury expects to spend Sh2.8 trillion in the current financial calendar. A big chunk of this spending will be on recurrent items, such as wages and allowances, pension, hospitality, car maintenance, travel and other administrative costs.
Recurrent expenditure is expected to gobble up close to Sh1.8 trillion, while development expenditure will take up Sh675.2 billion.
The counties, which have complained about delays in receiving money from the Exchequer for three months, are expected to get Sh342.5 billion as equitable share from the taxes collected.
However, the Treasury had estimated that it would collect Sh1.6 trillion in taxes by June next year, which leaves it with a Budget hole of Sh1 trillion.
This hole, technically known as a fiscal deficit, was to be plugged through both domestic and external borrowing of Sh600 billion and Sh401 billion, respectively.
Moreover, the Kenya Revenue Authority (KRA) has underperformed in tax collection - it collected Sh70 billion less in the four months to October than over a similar period last year.
This leaves the Treasury in a catch-22: to either cut spending or take up more debt, but with the Government expected to do most of the heavy lifting to stimulate the economy through increased spending, cutting spending is not an option.
The Government has already earmarked close to Sh57 billion for a stimulus package to help bring the economy back to life. Moreover, to minimise costs and risks of public debt, the Treasury intends to borrow mostly from the domestic market at 72 per cent, with 28 per cent from external sources over the medium term.
This would help it deal with exchange rate risks. Already, the country is grappling with a weak shilling that, for instance, inflated the country’s stock of external debt by Sh58 billion between June and August when it traded at 108.2 against the dollar from an average of 106.5.
In its medium-term debt sustainability (MTDS), the Treasury acknowledged the risk of a volatile exchange rate, and asked all State corporations to continue pursuing austerity measures and maintain macroeconomic stability.
“Any adverse shock on the macroeconomic variables, such as the exchange rate or interest rates, will directly translate to deterioration of the debt position and debt service burden and hence fiscal instability,” said the Treasury.
But while it plans to borrow mostly from the domestic market, the Treasury has noted the risks of having banks, spooked by a volatile business environment, largely lend to the government rather than to the public.
“Accordingly, in addition to reducing fiscal deficits, the actual financing of the fiscal deficits must gradually be biased away from domestic sources and towards external sources and to ease crowding out of the private sector in the domestic credit debt market,” said the Treasury.