“Kenya has never defaulted on its loans and is not about to.”
This is the well-worn statement that National Treasury officials send out whenever questions are raised about the country’s debt burden.
But Covid-19 is no respecter of charms. The pandemic has exposed Kenya’s razor-thin fiscal space, with the risk to default rising sharply.
The National Treasury, which is late two months in the disbursement of funds to counties, might also be falling behind in the repayment of some of its loans amounting to Sh46 billion.
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Analysis of official data indicates that Treasury might have failed to service external loans valued at about Sh10 billion to 10 Paris Club countries, forcing it to negotiate for a debt repayment holiday.
On Monday, the Paris Club, an informal group of creditors that aids borrowers in distress, agreed to offer Kenya debt relief following the country’s application for debt service suspension initiative (DSSI) under the auspices of the G-20.
Treasury had also indicated to parliament and the World Bank that it would be repaying over Sh83 billion in loans to China in the 2019-20 financial year. It paid only Sh47.4 billion, leaving it with a balance of Sh36 billion.
In the first three months of the current 2020-21 year, Treasury might have underpaid the bilateral lenders under the Paris Club by Sh1.3 billion, according to an analysis of official debt data by Weekend Business.
Data from the World Bank Debtor Reporting System (DRS), which captures detailed information at loan level for external borrowing of reporting countries, indicates that Kenya was supposed to pay around Sh5.8 billion between July and September, last year.?
However, Treasury’s Quarterly Economic and Budgetary Review shows that the country only paid Sh4.5 billion in the first three months of the 2020-21.
Attempts to get clarification from the National Treasury on why there was variation on the two data sets were not successful.
It was also not immediately clear if Kenya had negotiated for debt-restructuring with some of the owed countries.
Some of the countries with which Kenya has negotiated for debt-restructuring before, include Japan, Denmark, Switzerland, Finland and France.
Restructuring of most of these loans was done in 2000.
Weekend Business sought clarification from National Treasury Cabinet Secretary Ukur Yatani on whether Kenya had struck a debt-restructuring agreement, but he had not responded by the time we went to press.
However, Treasury has talked of undertaking a debt-restructuring plan that will include replacing its many short-term domestic loans with long-term financing.
“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.
Between July and September last year, Japan was paid Sh325 million instead of Sh1 billion that Kenya had reported to the World Bank on July 2 that it would pay the Asian country.
Italy was to get Sh389 million, but the National Treasury gave it a paltry Sh2.7 million.
Treasury is yet to release its figures for the period between October and December 2020 but by that time, Kenya was expected to have repaid close to Sh17.1 billion to these countries.
This would have left Treasury with close to Sh23.4 billion worth of loans to be repaid in the period between January and June 30 this year, with the Finance ministry estimating its total loan obligations to these countries in the entire financial year at Sh40.5 billion.
This means that loans due to the Paris Club countries in the six months were around Sh23.4 billion, which the government was supposed to save after a debt service suspension.
However, in a statement to the media, Treasury insisted that debt-repayment suspension from the 10 nations will see the country save up to Sh32.9 billion, an overstatement of close to Sh9.5 billion, according to DRS.
“Sh32.9 billion is the amount due for payment (interest, principal etc) to various partners under the Paris Club between January to June 2021,” said Yatani in response to our queries.
He, however, did not provide a breakdown showing how much would be freed up from each country.
The government, which has rolled back the tax reliefs implemented to cushion the impact of Covid-19 in a desperate move to raise more revenue, has officially started the process of seeking debt forgiveness from its external creditors.
Other than bilateral lenders under the G-20, Kenya’s plan for a debt-repayment holiday is also expected to rope in domestic lenders such as pension funds and insurance companies in what is expected to free up funds to keep the government machinery rolling.
The Paris Club members that agreed to the DSSI were Germany, France, Italy, South Korea, Canada, Spain, United States of America, Denmark, Belgium and Japan.
“The Government of the Republic of Kenya is also committed to seek from all its other bilateral official creditors a debt service treatment that is in line with the agreed term sheet and its addendum,” said the Paris Club.
“This initiative will also contribute to help the Republic of Kenya to improve debt transparency and debt management.”
The moratorium applies for the loans that were due for six months between January and June this year.
Despite the government’s bullish rhetoric that the country’s debt is sustainable, red lights are blinking with Kenya’s risk to debt default reclassified to high from moderate by the World Bank and International Monetary Fund .
This means that Kenya is one step away from joining other defaulting countries such as Zambia.
The country’s debt vulnerabilities have been aggravated by poor export and tourist earnings, two key foreign exchange (forex) earners. Forex is critical for the repayment of external loans.
The government, whose coffers have been devastated by the Covid-19 pandemic, has also run short of cash for hospitals and schools, leading to healthcare providers downing their tools.
Meanwhile, school heads have said the Sh19.5 billion that the government disbursed to them is insufficient to run the institutions.
Restriction in movement locally and globally to contain the spread of Covid-19 has resulted in poor tax collection as economic activities in key sectors remain muted.
The government, though, is confident that with the easing of most of these restrictions and removal of tax relief, the economy will spark again.
“With the opening up of the economy and the reversal of the Covid-19 tax relief measures, the National Treasury expects revenue-collection to improve from the current quarter (third) and will prioritise disbursements to county governments with a view to clearing the arrears,” said Yatani in a statement last week, while acknowledging that disbursements to counties were behind by two months.
He said Treasury had so far transferred Sh133 billion to county governments for the current financial year - Sh120.2 billion as equitable share and Sh13 billion as conditional grants.
Reduced tax revenues have seen the Treasury plunge into the credit market, with the government expected to borrow over Sh1 trillion by June this year.
However, as a short-term remedy, Treasury is looking at negotiation for a debt service moratorium, which could see it save over Sh140 billion in the next six months.
This is nearly enough for the 47 counties, which fear Treasury’s failure to disburse funds will cripple their operations.
In total, Kenya is expected to repay close to Sh334.3 billion by the end of the financial year in June with a big chunk of the payout going to China, which is expected to receive Sh95.1 billion.
Loans due to China in the next six months, including the first payment for the Nairobi-Naivasha Standard Gauge Railway, are Sh55 billion.
However, analysts say China has been playing hardball, insisting that loans given by its banks are commercial and should not be frozen under the G-20 initiative.