Kenya has scrapped plans to issue a $1 billion eurobond that was expected by end of June as the rising cost of financing foreign debt coupled with a relentlessly depreciating currency dampened the sustainability of the planned issuance.
Dr Haron Sirima, Director-General at the Public Debt Management Office of the National Treasury told The EastAfrican that the ministry reached the decision “due to high volatility in the international capital markets.”
Already, yields on the 10-year bonds maturing in 2024 and 2028 have risen sharply and continue to spike amid the Ukraine conflict and the announcement by major central banks, including those in US and the UK, signalling higher repayment costs.
Julius Muia, Principal Secretary at the National Treasury, had earlier expressed fears that the growing yield of existing eurobonds might compel government to explore alternative borrowing sources to finance the budget deficit.
“We are still keen on the international market for funding resources but are cautious about the yields which are currently elevated. We have to be careful about the yields to keep our financing sustainable,” Mr Muia said.
Kenyan economist Tony Watima told The EastAfrican that in the prevailing conditions in the eurobond market, it would be unwise to go to the market.
“Kenya’s debt restructuring plan is to move away from foreign-dominated commercial loans, which come with high risks, and go for more concessional loans. So, issuing another eurobond at this time means we are scaling back on the restructuring plan,” Mr Watima said.
In this financial year, Kenya has spent $9.8 billion, about 31 percent of its total budget, in debt repayment. Treasury estimates that it will spend up to $11.6 billion — about 64 percent of the expected tax revenue — to repay the country’s loans in the financial year beginning July 1.
Now, rising dollar shortage — partly blamed on the rising cost of servicing external debt — is crippling manufacturers’ operations, with some even mulling closing shop and others demanding payment from customers in dollars rather than the shilling.
While Dr Patrick Njoroge, Governor of the Central Bank of Kenya, has denied claims of dollar shortage, the Kenya Association of Manufacturers say they are unable to access enough dollars in the market at the official price.
Debt distress and risk
The National Treasury will, nonetheless, have to continue borrowing to bridge the $7.4 billion budget deficit in the 2022/23 financial year, but will now have to explore other options.
“We continue to borrow externally, with strong bias on concessional loans, to support balance of payment position and safeguard crowding out the private sector,” Dr Sirima told The EastAfrican.
In addition to the loans given on better terms, Dr Sirima said growing revenue collection, as has been observed in the last few months, will help narrow the budget deficit.
According to the International Monetary Fund’s latest debt sustainability report released in March 2021, Kenya’s risk of external and overall debt distress remained high, exacerbated by economic shocks, declining exports and economic growth prospects.
Kenya has the highest debt stock in the region, at $70.7 billion — 68.4 percent of GDP, and has a ‘high’ risk of debt distress risk.
Burundi also has a high risk of external and overall debt distress, with a debt stock of $1.9 billion, 67 percent of its GDP, according to IMF’s latest statistics.
Uganda, with a debt stock of $20.7 billion (49.7 percent of GDP) is the least exposed to debt distress in the region, with a ‘low’ rating from the IMF.
Tanzania was recently moved to a moderate risk level after its debt stock rose to 60.6 percent of GDP ($37.8 billion) in March.
Rwanda’s risk remains moderate as well, although IMF estimate its debt stock to reach 80 percent of GDP by end of 2022.
But still, the Kenyan parliament voted on June 7 to increase the country’s debt ceiling from Ksh9 trillion ($76 billion) to Ksh10 trillion ($85 billion), to allow for the borrowing of $7.4 billion deficit in the budget for the financial year starting on July 1.
Parliament had previously raised the ceiling from Ksh6 trillion ($51.2 billion) in October 2019, when the debt stock stood at 55 percent of GDP and was expected to hit $55 billion (Ksh6.4 trillion) in eight months.