NAIROBI, Kenya, Feb 19 – Kenya is set to pay Sh658.2 billion in loans in the current financial year ending June 2018.
This is 40.3 per cent of the Sh1.6 trillion revenue target.
According to a new report by Cytonn Investments, Kenya’s total debt burden has been rising steadily, increasing by 22.2 percent year on year to hit Sh4.6 trillion in November 2017 from Sh3.8 trillion in November 2016.
Some of the loans include the eight-year commercial loan of Sh77. billion from the Eastern and Southern Africa Trade and Development Bank (TDB), formerly PTA Bank, taken to pay off debt holders of the 2015 syndicated loan who declined to extend maturity, the maturing Sh75 billion from the five-year Eurobond issued in 2014 that matures in June 2019 and a Sh80.9 billion syndicated loan that was taken in 2016.
The new report says the rising government debt has been driven by an ever-expansionary budget over the years with the government embarking on infrastructural spending on projects that are expected to develop the country and spur economic growth, and a shortfall in tax revenue that has resulted in a widening budget deficit.
The report now warns moving forward Kenya’s debt could hit a crisis if the government doesn’t invest borrowed funds in projects with high enough economic returns to guarantee debt repayments and diversify the economy by reducing overreliance on agricultural produce.
“It is, however, important to note that Kenya is moving towards a better-diversified economy, with agriculture contributing 18.8 per cent of GDP as at Quarter 3 of 2017 compared to 23.7 per cent in 2010 and 31.3 per cent in 2000, and other sectors such as tourism, manufacturing, construction and real estate supporting the economy and driving growth,” the report notes.
China remains Kenya’s largest bilateral lender, having lent Kenya a total of Sh520 billion as at December 2017, compared to Japan at Sh82.5 billion and France at Sh62.3 billion.
Foreign debt from commercial banks, which is largely non-concessional, has been rising steadily from a 20.3 percent contribution in March 2015 to 30.7 percent in September 2017, and Multilateral foreign debt, which is largely composed of concessional facilities from organizations such as the International Development Association (IDA) and the ADB and ADF, has been on a steady decline, from 48.4 per cent to 36.5 per cent in the same periods.
According to the Draft 2018 Budget Policy Statement, the government maintains that the country’s public debt is currently still sustainable, but has put measures it will take to maintain this that include better revenue mobilization with plans to revamp the Income Tax Act and expanding the tax base through targeting the informal sector.
The government also plans to borrow only for development expenditure, while maximizing on external concessional loans and keeping commercial loans limited only to projects with very high economic returns, and, minimizing foreign exchange risk that external loans are exposed to, by diversifying the currency structure and composition of external debt.
“These measures, if implemented, will serve to reduce the public debt levels while boosting economic growth. However, international organizations still remain sceptical with forecasts indicating that public debt could shoot past 60 percent of GDP by June 2018, especially with the expected March 10-year Eurobond issues,” the report states.
Kenya is however not alone, compared to other countries at the sub-Saharan Africa with economies.
According to the report, Ghana’s public debt situation is currently being looked at as a possible crisis caused by plummeting global commodity prices and their over-reliance on commodities, and public funds being placed in projects that have not ensured the borrowed money can be paid out in time.
“The Ghanaian Government got to a point where it was borrowing mainly to pay back maturing debt instruments and plug in the deficit arising from dismal revenue collection in 2013,” the report reveals.
Mozambique, on the other hand, is in an actual crisis after defaulting on debt payments and its debt-to-GDP ratio hitting 113.6 percent in 2016 with Kenya still at 52.6 percent in the same period.
Kenya’s 2017 Debt to GDP Ratio is estimated at 56.2 percent, up from 52.6 percent in 2016 and 44.4 percent in 2010 above the EAC Monetary Union Protocol, the World Bank Country Policy, and Institutional Assessment Index, and the IMF threshold of 50.0 percent.
Credit rating Moody’s projects that the ratio will surpass 60 percent by June 2018 unless decisive policies are implemented by the government that includes cutting into government’s spending and increases revenue collection.
The 2017 ratio is estimated at 34.8 percent up from 16.5 percent in 2012, and above the 22 percent IMF threshold.