Restructuring to push commercial debt up by 9pc

Saturday March 21 2020

Treasury CS Ukur Yatani at a past event. Parliament has expressed concerns over Treasury’s plans to increase commercial loans in efforts to manage the country’s growing debt. PHOTO | FILE | NATION MEDIA GROUP


Kenya is seeking to increase its share of commercial borrowing in the next financial year even as Parliament raises concerns.

A parliamentary report released recently showed that in the last seven years, interest payments as a share of tax revenue has almost doubled. Now, Parliament is asking National Treasury Cabinet Secretary Ukur Yatani to limit the use of commercial debt over the medium term in order to reduce refinancing risk.

“The interest payments as a share of tax revenue increased from 14 per cent to 26 per cent between 2013 and 2018, while in the last eight years, these same payments have increased from 1 per cent of exports of goods and services to about 8 per cent as at the end of the last financial year,” read the report by the Parliamentary Budget Office.

Treasury is also seeking to change the country’s external debt composition by reducing concessional borrowing to 15 per cent in the 2020/21 financial year from the current 34 per cent. On the other hand, it proposes to increase commercial financing from the current 4 per cent to 13 per cent. This will see commercial borrowing increase from Sh274.4 billion to Sh313.1 billion.


“This seems to contradict the governments promise during the approval of the budget ceiling of shifting from external commercial loans to concessional facilities.


It is now obvious that the commercial share of the total debt is increasing rapidly,” Budget and Appropriations Committee chairman Kimani Ichung’wa said, adding that “this will come at a very high cost to the economy due to an increase in the interest rate repayment component of the debt service.”

In the Budget Policy Statement, Mr Yatani has also proposed to change the ratio of domestic to external debt financing.

“The medium term debt management strategy proposes a more pro-domestic borrowing strategy of 72:28 of domestic debt to external debt as compared to the current one of 62:38,” Mr Ichung’wa said.

Parliament has also asked the Central Bank of Kenya (CBK) to boost foreign reserves to cover the country’s repayments on external debts.

As of end of December 2019, public debt amounted to Sh6.04 trillion, comprised of Sh2.9 trillion (49 per cent) domestic debt and Sh3.1 trillion (51 per cent) in external debt.
Mr Ichung’wa said the committee was “concerned over Kenya’s vulnerability associated with debt service.”


As of the end of last year, Kenya’s ratio of debt service to exports stood at 29.3 per cent, while and ratio of debt service to revenue stood at 45.2 per cent, breaching the thresholds of 21 per cent and 30 per cent, respectively, set by the International Monetary Fund.

Kenya’s public and publicly guaranteed stock of debt has grown at an annualised rate of 19 per cent for the past 10 years. This has been due to increase in expenditure on infrastructural investments, provision of free services, shortfalls in revenue, and shrinking fiscal space as a result of increase in compulsory expenditure such as debt servicing payments.

The country continues to face greater debt refinancing pressure, especially from domestic debt.

As of December last year, up to Sh990.9 billion (34.9 per cent) was expected to reach maturity in one year. This is a marginal reduction from Sh1.04 trillion in the current financial year, indicating sustained refinancing pressure.

“We are also concerned that the domestic debt portfolio has a higher refinancing risk due to higher proportion of short term instruments … and higher interest rate risks compared to the external debt portfolio,” Mr Ichungwa said.


The Budget office also says that a review of external debt sustainability indicates that while minimum risk will emanate from the pressures of external debt service on revenue, external debt and its servicing are expected to surpass their corresponding thresholds as from this year.

Last week, CBK started a four-month exercise to buy dollars from commercial banks to boost reserves. The country has so far issued three Eurobonds in values of Sh275 billion, Sh200 billion and Sh210 billion, which will all require dollars to service.

The Sh200 billion Eurobond was issued in two Sh100 billion tranches of 10 years at a coupon of 7.25 percent and 30 years at a coupon of 8.25 per cent.

The interest is payable semi-annually. Annually, taxpayers will fork out Sh15.63 billion in interest payments for this Eurobond.