Kenya's public debt doubles as government goes into loan frenzy

President Uhuru Kenyatta’s insatiable appetite for loans to fund infrastructure projects has seen Kenya’s public debt double under his watch to Sh3.6 trillion in September.

Yes, each Kenyan owes creditors a pound of flesh, currently at Sh79,256 per citizen, and growing.

As at June 2013, barely two months after assuming power, Nairobi’s volume of debt stood at Sh1.9 trillion, equivalent to 42 per cent of GDP.

The borrowing frenzy has been fuelled by China, which has recently upped the ante in doling out loans to Kenya, to overtake Japan as Nairobi’s biggest bilateral lender.

Kenya’s total borrowings as at September is equivalent to 48 per cent of GDP, according to fresh data from the Treasury.

The rebasing of GDP in 2014 gave the Jubilee coalition headroom to increase sovereign borrowing in a bid to cut reliance on the local debt market where the government was crowding out private borrowers.

This mounting pile of debt will see Kenya spend Sh618.56 billion on public debt repayments in the coming fiscal year beginning July 2017, up 39 per cent from this year’s Sh446.4 billion in obligations.

In essence, the government is currently spending Sh32 out of every Sh100 collected from taxpayers to service external and domestic debt. This will rise to Sh40 for every Sh100 tax collected in the next fiscal year.

RAPID PACE

The International Monetary Fund (IMF) warns in its report that while Kenya’s public debt remains sustainable, the margin for further debt accumulation is narrowing at an uncomfortably rapid pace and exposing the country to potentially difficult times ahead if the borrowing spree is not tamed.

“Kenya’s risk of external debt distress remains low, while overall public debt dynamics continue to be sustainable. However, margins have generally narrowed,” IMF says in its March report.

“The bulk of Kenya’s external public debt carries concessional terms, but recent commercial borrowings entails significant repayment needs,” reads the IMF review paper.

Public debate on State borrowing was ignited by the floating of Kenya’s inaugural sovereign bond in 2014 — sparking a debate on the use of the proceeds.

Hitherto, Kenyans had been relegated to video clips and photos of the finance minister signing and shaking hands with bilateral and multilateral lenders offering funding to Nairobi.

Kenya in June 2014 floated a $2 billion (Sh207.4 billion) sovereign bond on the Irish bourse and later in December that year went back to the market for an additional $750 million (Sh77.8 billion) in what is known as a tap sale.

The first use of the Eurobond was to retire a costly $604.5 million (Sh62.7 billion) syndicated loan Kenya had borrowed from commercial banks in 2012 to fund development projects. A further $1.39 million (Sh144.1 million) was forked out of the bond as expenses relating to transaction advisory fees, bank charges, and federal taxes.

This means that Kenya received $2.21 billion (Sh229.2 billion) as net proceeds from the Eurobond to finance mega public works.

PROJECTS FUNDED BY DEBT

However, the Treasury has declined to publish a schedule of how the Eurobond cash was spent, despite an earlier promise to do so.

Foreign-denominated debt — owed to bilateral and multilateral lenders, commercial banks, and suppliers — stands at $16.9 billion (Sh1.8 trillion) in the period under review.

China has advanced Kenya loans worth $3.1 billion (Sh321.5 billion) in the period to September, accounting for 8.6 per cent of total debt, to take pole position in terms of bilateral lenders.

Analysts reckon that Nairobi’s love for Beijing debt is due to the fact that it is deemed to have no “strings attached” unlike western donors who lay down tough conditions such as good governance, accountability and sustainability before issuing loans.

Japan, which ranks second, has advanced Kenya loans worth $948.2 million (Sh98.3 billion) as at September 2016, according to official data.
A majority of President Kenyatta’s flagship infrastructure projects are funded by debt.

The 495-kilometre Mombasa-Nairobi standard gauge rail line, currently under construction, is being financed through a $2 billion (Sh207.4 billion) commercial loan from the Chinese government and a further $1.6 billion (Sh166 billion) in a semi-concessional loan from Beijing.

Japan has advanced Kenya ¥26.7 billion to fund the building of a second terminal at the port of Mombasa expected to be completed by 2018; with a capacity of 1.2 million containers.

Kenya Pipeline also turned to commercial lenders for a $350 million (Sh36.3 billion) syndicated loan to bankroll the construction of a new Mombasa-Nairobi oil pipeline.

REAP FRUITS

It remains to be seen when Kenyans will begin to reap the fruits of the heavy borrowing, and whether the investments will catalyse economic growth, and create jobs.

KenGen’s $1.3 billion 280 MW geothermal project at Olkaria - Africa’s largest steam development – was funded by multilateral lenders including the World Bank, Japan International Co-operation Agency, European Investment Bank, French Development Agency (AFD) and the German Reconstruction Bank (KfW).

Kenya Pipeline also turned to commercial lenders for a $350 million syndicated loan to bankroll the construction of a new 450-kilometre Mombasa-Nairobi oil pipeline to replace the current one which has been in use since 1978.

Israel has committed to finance a large portion of the ambitious Sh400 billion Galana-Kulalu one-million-acre irrigation scheme which has already harvested the first crop from a10,000-hectare model farm.

Mr Kenyatta has announced that he’s seeking investors to fund the $18.1 billion Lamu Port—Southern Sudan—Ethiopia Transport (LAPSSET) corridor project under a public-private partnership model.

It remains to be seen when Kenyans will begin to reap the fruits of the heavy borrowing, and whether the investments will catalyse economic growth, and create jobs.

More than half or 52 per cent of Kenya’s borrowings as at September is domestic debt with the remaining being external debt, Treasury data shows.

The stock of gross domestic debt – T-bills, t-bonds and infrastructure bonds – stood at Sh1.9 trillion in September 2016.