Red flag raised over Sh1.2trn public loan deadline
Thursday, October 31, 2019 10:20
By PATRICK ALUSHULA
Taxpayers will require Sh1.2 trillion over the next one year to settle nearly half of the public domestic debt, prompting the World Bank to warn that the repayment will have economic consequences.
The World Bank says 43 percent of the Sh2.87 trillion public domestic debt — which is owed to local investors — will mature in September next year. The amount is equivalent to 82.3 percent of the Sh1.496 trillion that the Kenya Revenue Authority (KRA) collected in the year ended June, underlining the taxpayers’ burden of repaying the maturing domestic debt.
Kenya has the option of negotiating with the lenders, mainly banks, insurance firms and pension schemes, to extend the maturity of the loans. However, the World Bank reckons that the extension option is fraught with risks, including resistance from holders of the bonds looking for other investments, especially banks that might want to return to lending to individuals and businesses if the cap on loans is removed next week.
“The government could face challenges in rolling over such bonds in an environment of no interest rate caps, low subscription rates and overexposure of commercial banks to these assets,” the Bretton Woods institution cautions in its latest update on the Kenyan economy.
“Debt service obligations will continue to impose significant fiscal strain on the Exchequer. Kenya could face fiscal pressure in meeting it’s near-term debt and repayments obligations”.
The removal of the caps had the effect of putting pressure on the cost of bonds and Treasury Bills, a pointer that the Treasury would need to pay higher interest rates on domestic debt, further increasing the repayments costs.
The National Assembly’s Finance Committee has asked Parliament to repeal the cap on commercial lending rates, in line with the President Uhuru Kenyatta’s demands, improving chances that the restriction on lending rates would be lifted.
The cost of domestic debt tends to be higher compared to foreign borrowing. Cumulative interest on domestic debt is three times higher than that of foreign debt despite total borrowings from foreigners being 9.1 percent higher than local public loans.
Kenya has on several occasions borrowed money to retire old debt and avoid tapping taxes for loan repayments.
It recently issued a third Eurobond of $2.1 billion (Sh216 billion) to repay $750 million (Sh77.2 billion) of the first Eurobond.
Treasury is currently working on a plan to reduce its expensive local borrowing in favour of concessional loans from foreign lenders. This is aimed at making repayments schedule more bearable.
Banks accounted for 53.18 percent of the domestic debt, pension schemes (28.81 percent), parastatals (7.17 percent), Insurance firms (6.5 percent) and others 4.34 percent.
The World Bank warns that taxpayers would be strained if Kenya fails to negotiate for the bulk of the maturing domestic debt.
“The alternative will mean using tax revenue to pay the debt, but this will be a huge risk,” said Peter Chacha, a senior economist at the World Bank.
Kenya used Sh57 for every Sh100 collected as taxes in the three months to September for debt payments, underlining the burden of unchecked government borrowing.
The Treasury data shows that Sh214.79 billion was used for loans repayments in the first quarter of the financial year, making it the single-largest expenditure in the period to September. The repayments accounted for 57 percent of the Sh372 billion tax collections.
Kenya has ramped up spending in recent years to build a modern railway line, new roads and electricity plants, driving up borrowing to plug the Budget deficit.
The public debt crossed the Sh6 trillion mark in July, up from Sh1.89 trillion in June 2013, a growth that has sparked concerns that the ballooning loans risk hurting the economy on the huge debt repayment burden.