Kenya acquired an additional debt of $3.03 billion from the World Bank and the International Monetary Fund at the height of the Covid-19 pandemic to raise its foreign reserves and ease growing budgetary pressures.
The government also suspended debt service payments amounting to $514 million in January 2021, to alleviate the pandemic’s onslaught on public finances.
In its latest Kenya Economic Update Report (June 2022), the World Bank shows that its lending and that of the IMF helped finance the country’s current account deficit, maintain foreign reserve coverage and finance the monthly fuel subsidy of about $66 million.
The borrowing that was secured in the past year drove the public debt to Ksh8.4 trillion ($72.41 billion) in March 2022.
The debt comprises IMF’s Extended Credit Facility (ECF)/Extended Fund Facility (EFF) worth $565.6 million, Special Drawing Rights (SDR) general allocation of $725.7 million in August 2021, and World Bank ‘s development policy financing of $750 million secured in June 2021.
In March, the country took on World Bank development policy financing of $750 million, and, in April, the IMF approved the country’s economic reform progress for the release of $244 million financing towards the country’s budgetary support.
Kenya had delayed repaying some of its debt.
The G20 countries agreed to a Debt Service Suspension Initiative (DSSI) on April 15, 2020, to provide direct liquidity support to the poorest countries following a joint call by the IMF and the World Bank backed by G7 finance ministers and central bankers.
However, according to the Organisation for Economic Co-operation and Development (OECD) the “debt service standstill” only provided a temporary respite but not relief since the beneficiaries will have to fully repay the outstanding amount with interest to compensate for the delay, which could be significant for non-concessional loans.
Conditions for poor and least developed countries to access the debt service suspension initiative are non-concessional debt during the suspension period, disclosing all public sector financial commitments, and using the freed funds to increase social, health or economic spending in response to the Covid-19 crisis.
However, there are signs that Kenya will increase its borrowing. This week, the country’s lawmakers approved a proposal to raise the debt ceiling to Ksh10 trillion ($86.2 billion) from Ksh9 trillion ($77.58 billion).
“Overall, while Kenya’s economy has been performing well, it continues to face elevated uncertainty and downside risks, including from mounting external headwinds,” says the World Bank said in its assessment released this week.
The bank estimates Kenya’s economy will grow by 5.5 percent in 2022, and 5.2 percent on average in 2023–2024, a robust pace but lower than the 7.5 percent rate in 2021,
Growth in exports of tea, coffee and cut flowers will slow down as the outlook for Kenya’s major export markets weakens.
Tourism and transport are also expected to see a more sluggish recovery.
According to the report, key domestic risks to impact on the country’s growth include a more virulent pandemic, election-related disruptions, and adverse environmental and weather developments.
Food insecurity is rising in Kenya, and up to five million people will need food assistance by September.
Kenya’s economy had recovered from the worst economic effects of the pandemic, with GDP increasing by 7.5 percent in 2021, higher than the estimated growth in sub-Saharan Africa of 4 percent.
However, the economy is vulnerable to commodity price shocks, particularly through fuel, fertiliser, wheat and other food imports.
“Economic growth is expected to moderate in 2022,” the World bank report states. “Offsetting the continued recovery from the pandemic is the impact of the war in Ukraine, which has clouded the outlook for the global economic recovery.”
The persistently large budget deficits and, more recently, the pandemic and government actions to mitigate its effects, increased Kenya’s public debt to 67.8 percent of GDP as of March 2022, up from 50 percent of GDP in June 2016.
The situation has been compounded by the weakening shilling against the dollar, increasing the cost of debt servicing.
The local unit depreciated by 3.5 percent against the dollar last year, and has maintained its downward trend to Ksh117 on Thursday.
The government introduced a fuel subsidy in October 2021 through the petroleum development levy fund.
Allocations to fuel price stabilisation for 2021/2022 fiscal year were Ksh25 billion ($215.51 million).
In the third quarter (January-March) of the 2021/2022 fiscal year, Kenya’s total expenses on fuel subsidies were Ksh34.1 billion ($293.96 million).
According to the report sustained accumulation of pending bills remains a substantial challenge to businesses’ cash flow and liquidity.