Ruto faces the return of expensive foreign loans in the first year


Ruto faces the return of expensive foreign loans in the first year

President William Ruto addresses Kenyans after being sworn in at Moi International Sports Centre, Kasarani on September 13, 2022. PHOTO | JEFF ANGOTE | NMG

The Treasury said Kenya would struggle to maintain its dependence on multilateral lenders like the World Bank Group for external financing, signaling a return to expensive foreign loans in the first year of the new administration. .

Over the past three financial years, Kenya has made extensive use of cheaper concessional loans, helping to slow the accumulation of expensive short-term foreign trade credit and loans from rich countries that are largely granted on semi-concessional terms. concessional.

In the year to June 2022, the country reduced its external commercial debt at the highest rate since its first Eurobond eight years ago.

The stock of bilateral loans from wealthy countries like China also fell for the first time in seven years, while credit from multilateral lenders rose for the fourth consecutive year.

“Multilateral (mainly World Bank) debt increased while bilateral debt [has been] declining, reflecting further easing of the terms of the external debt portfolio in line with the medium-term debt strategy,” said Director General of the Public Debt Management Office at the Treasury Haron Sirima. “The challenge is to maintain this trend.”

As part of the medium-term debt management strategy, Kenya aims to “optimize the use of concessional sources of finance and lengthen the maturity profile of public debt through the issuance of medium and long term and to deepen the domestic debt market in order to be able to finance a larger part of the budget. deficits”.

Concessional external loans from multilateral lenders such as the World Bank and the African Development Bank carry, on average, a fixed interest rate of 1.75%, with a term of 35 years and a grace period of up to ‘in 10 years.

The semi-concessional loans mature in approximately 22 years, including a seven-year grace period, and carry a fixed interest rate of approximately 2.3%.

On the other hand, external commercial loans are based on a reference rate plus a margin, which makes them expensive due to prevailing market conditions like high inflation which has made money expensive.

In the year to June 2022, multilateral lenders transferred $942.19 million (113.06 billion shillings) to Kenya, with the World Bank and IMF accounting for almost three quarters, or 701.92 million dollars (84.23 billion shillings), of this amount.

Treasury data further shows that bilateral loans fell by $618.37 million (74.20 billion shillings), while foreign commercial loans fell by $984.61 million (118.15 billion shillings). shillings) during the period under review.

During the year under review, the Treasury abandoned plans to issue at least $1bn (120bn shillings) of Eurobonds after interest demanded by investors doubled to around 12% , against 6.3% a year earlier for a similar amount.

President William Ruto, who took office last Tuesday, has pledged to cut costly foreign borrowing, including from wealthy countries like China.

Dr. Ruto is committed to implementing policies that improve tax compliance levels and increase national savings.

“I look forward to the day, soon enough, when we will borrow from the Kenyan people’s savings to manage our development instead of borrowing from other countries, and that is what the future holds for us,” he said. he said on 9/11. before being sworn in.

Concessional loans

Dr Ruto has shed little light on how he plans to deal with soaring public debt. Kenya’s debt more than quadrupled to 8.580 billion shillings under Dr Ruto’s predecessor. The surge in liabilities has put the country at high risk of debt distress, according to the IMF.

The new administration faces an 862.5 billion shillings hole in the 3.3 trillion shillings budget for the year ending June 2023. The Treasury projects that 280.7 billion shillings of the deficit will be financed by foreign creditors, with domestic investors assuming the remaining 581.7 shillings. billion.

Kenya has turned to multilateral institutions for concessional loans following the Covid-19 pandemic which has ravaged revenues and limited access to commercial loan markets.

The country had steered clear of direct budget financing from institutions such as the IMF and World Bank under the administration of former President Mwai Kibaki, with most funds coming from projects.

Treasury data shows Kenya’s commercial debt portfolio, mostly Eurobonds and syndicated loans since the start of the pandemic, has fallen by $685.87 million (82.3 billion shillings) to in June 2022, from a jump of $6.33 billion (759.6 billion shillings) in the previous three-year cycle.

Bilateral debt, on the other hand, increased slightly by $219.97 million (26.4 billion shillings) in the three-year period between June 2020 and June 2022, a sharp drop from 4.4 billion of dollars (528 billion shillings) in three years until June 2019.

The strongest growth was seen in the multilateral debt portfolio, which jumped nearly $7.39 billion (886.8 billion shillings) in the three years to June 2022, from $904.35 million. dollars (108.52 billion shillings) between June 2017 and June 2019.

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