Kenya plans to raise up to $2 billion from the international capital markets in the next financial year to repay its 10-year Eurobond that is maturing in June 2024.
Last week, in an advertisement in the government publication MyGov, the National Treasury invited expression of interest from reputable financial institutions to provide transaction advisory services for the proposed Eurobond.
Treasury director of debt management Haron Sirma told The EastAfrican that “theoretically,” they are looking for up to $2 billion to settle the amount due on the 2024 Eurobond.
“It may also be much less depending on alternative financing sources,” he said.
This comes amid rising interest rates and strengthening US dollar, which have combined to make conditions in the global financial markets unattractive for capital raising.
Domestically, the government is facing difficulty meeting its revenue targets, with the International Monetary Fund ruling out restructuring of Kenya’s debt.
Missed revenue target
Official data shows that during the nine months to March 31, 2023, the Kenya Revenue Authority (KRA) missed its revenue collection target by Ksh715 billion ($5.29 billion), while the National Treasury missed its borrowing target (domestic and external) by Ksh775 billion ($5.74 billion).
Overall, the government, in a gazette notice dated April 14, 2023, says it missed its revenue targets by close to Ksh1.52 trillion ($11.25 billion) during the period, in addition to a fiscal deficit of Ksh862.5 billion ($6.38 billion) for the 2022/2023 fiscal year
The usable foreign exchange reserves had declined to $ 6.37 billion (3.56 months of import cover) as at April 13, 2023, way below the statutory threshold of four months of import cover.
The National Treasury has made several attempts to borrow from the domestic market at rates below 10 percent to finance its growing expenditure. But its efforts are being frustrated by investors who prefer short-term treasury bills to bonds, citing uncertainties in the economy.
Two tranches
In 2014, Kenya took up $2.75 billion in two tranches — a 10-year paper and five-year issuance, at interest rates of 6.78 percent and 5.87 percent respectively.
The five-year paper was repaid partly using the proceeds of another $2.1 billion Eurobond issued in May 2019.
The government started sliding into debt trap in 2014 after it was forced to issue $2 billion Eurobond to pay off a $600 million syndicated loan underwritten by Citigroup, Standard Chartered and Standard Bank.
Constrained external financing led to Nairobi suspending plans to tap international capital markets in 2022, forcing it to draw more extensively on its forex reserves to meet its external debt repayments.
Economists say that the economy is in a precarious state, where incomes have stagnated, exports stagnated, interest rates are high and investments are on a downward trend, if not stagnant.
“The government has to borrow to finance maturing international debt as well as domestic debt to avoid default. Commercial debt might be a stop-gap measure to allow time for negotiation for bilateral or concessional funding as these take time, time the government does not have,” said Reginald Kadzutu, CEO of asset management firm Amana Capital Ltd.
Public debt
Kenya’s public debt is estimated at Ksh9 trillion ($66.66 billion), with repayments consuming almost 50 percent of the total revenues.
According to Ken Gichinga, chief economist at Mentoria Economics, the economy remains sluggish owing to rising interest rates and low government spending on key areas such as devolution.
“The advantage of commercial loans is that they don’t come with excessive conditionalities. However, they can be quite expensive, particularly now when global interest rates are high,” he explained.
“It is risky, not because of the exchange rate which is rapidly depreciating against the dollar and might leave the country with an even greater debt burden,” Mr Gichinga added.
Kenya’s Treasury Principal Secretary Chris Kiptoo told parliament that the country was expected to repay soverign debts of Ksh254.16 billion ($1.88 billion) in 2024, Ksh114.37 billion ($847.18 million) in 2027 and Ksh127.08 billion ($941.33 million) in 2028.
Liability management
Dr Kiptoo said the National Treasury will implement liability management operations targeting the 2024 Eurobond maturity to smoothen the maturity structure of public debt over the medium term.
According to Tony Mwiti, economist and director at Clark and Hampton Ltd, the government has an option of printing more money, a model that was deployed by US President Roosevelt to stabilise the economy during the Great Depression in 1932.
“Deficit funding helps government avoid the Catch-22 situation of either burdening citizens with new taxes or taking new loans. It’s not about printing and funding as much as one can. No, there are real limits and real dangers but the limit is and can never be financial, seeing as governments are currency issuers. The real limit is inflation,” said Mr Mwiti
Last year, attempts by the National Treasury to raise $1 billion through a Eurobond issue for budgetary support collapsed over cost concerns, leading to more than Ksh900 billion ($6.66 billion) in pending bills.
“Kenya’s recurrent expenditure is currently not the problem but debt service and debt costs. Our fiscal deficit is a result of debt-funded recurrent expenditure and counties and very little development,” said Mr Kadzutu.
Debts plea
Meanwhile East African states are pleading to the Bretton Woods institution to write off their debt, even as the IMF has rebuffed Nairobi’s quest for restructuring.
Samuel Nyandemo, a senior lecturer at the University of Nairobi’s School of Economics, advises against quick-fix measures.
“The economy is nosediving, hence the need for careful well-thought-out policy intervention devoid of any rhetoric. the government should desist from taking commercial loans and seek concessionary loans. Remember most of the Eurobonds have already matured and are due, with a depreciating shilling,” he said. “Such quickfixes are going to backfire.”
According to the IMF, developing countries should tighten their belts.
“In countries where debt levels are elevated and debt is clearly unsustainable, restructuring is going to be unavoidable, and a well-functioning debt resolution framework will be vital to create the required fiscal space,” said Abebe Selassie, IMF African department director, at the World Bank and IMF Spring Meetings in Washington DC.
Debt restructuring
“On debt restructuring, the mere fact that you (Kenya) have Eurobonds maturing in ’25 or ’26 does not mean that you need debt restructuring. Kenya is not a country that we are expecting to do debt restructuring,” he said.
As of March, the IMF had 21 loan arrangements with countries in sub-Saharan Africa, including Uganda and Tanzania, with more programmes under discussion. Abebe said between 2020 and 2022, the Fund provided more than $50 billion through programs, emergency financing, and special drawing rights allocation.
But the IMF restructuring process has been criticised by legislators, civil society and the Vatican, who are vouching for debt forgiveness for developing countries.
“We discussed with the both the World Bank and the IMF on how our countries can take policy measures to stabilise the economic situation in our countries and how the two institutions can intervene without necessarily denying the policy space to do the things that they can do for their countries,” said David Ochieng, MP Ugenya and leader of the delegation to the World Bank and IMF Spring Meetings. The World Bank and IMF have been accused of failing to consider the challenges of the developing nations.
Additional reporting by Luke Anami
