SGR to push up cost of debt as five-year holiday ends

Standard Gauge Railway to push up cost of debt

Kenya will pay over Sh56.7 billion or 0.7 per cent of the economy for the Standard Gauge Railway this year, according to Budget estimates presented by the Treasury.

Paying back for the railway will reduce Kenya’s disposable income by 8.8 per cent as the five-year window period expires in 2019.

The money deducted before it hits Treasury’s pockets, known as non-discretionary spending, will increase from Sh490.5 billion to Sh535.7 billion.

Also called Consolidated Fund Services, this money only goes to pay debt, pensions and salaries of constitutional office holders and is equivalent to what the Kenya Revenue Authority (KRA) collected between June and November this year.

“The deficit excluding SGR related expenditures in the FY 2019/20 is projected at 4.6 per cent of GDP lower than the projected 5.3 per cent of GDP in FY 2018/19,” Treasury Cabinet Secretary Henry Rotich said on the Budget Policy Statement.

Treasury is feeling the pinch of maturing debt but insists the pain will not last long as remedial action is being taken to reduce the rate of borrowing.

CS Rotich says the government will look for loans that take longer to mature to avoid the situation that has seen Kenya pay its first Eurobond, two syndicated loans and begin repaying for the SGR.

“To reduce the refinancing risk, the government’s strategy is to restructure public loans using external and domestic loans of longer-term maturities,” reads the BPS.

While the government trumpets its commitment to austerity, Treasury sees the gap between the budget and projected revenues to hit Sh623.8 billion.

If Kenya receives grants on time, then the overall fiscal deficit is projected to reduce to Sh572.2 billion, which will force the National Treasury to opt for more debt.

“The fiscal deficit in FY 2019/20 will be financed by net external financing of Sh306.5 billion (2.7 per cent of GDP), Sh271.4 billion (2.4 per cent of GDP) net domestic borrowing and other net domestic receipts of Sh5.7 billion,” Rotich said.

Treasury noted that Kenya’s risk-to-debt distress has been raised from low to moderate on account of refinancing risks on external debt.

Rotich however says this is expected to be short term as the government continues with its fiscal consolidation plan and implements the liability management strategy so as to restructure short-term commercial loans by replacing them with long dated maturities.

“The liability management strategy also aims at limiting non-concessional loans to projects with high economic and social returns to stimulate growth and exports which will improve the debt sustainability ratios,” reads the BPS.

Kenya’s reliance on dollar debt has brought with it the threat on the shilling, which would skyrocket if the Kenyan currency loses to the dollar.

“Shocks to exchange rates, which could impact the size of debt servicing, the terms of trade and inflation; contingent liabilities from key state corporations; and the risks associated with the devolved system of governance,” Rotich said.

Since Kenya’s graduation to lower middle-income economy, access to concessional funding is slowing down.

The Cabinet Secretary says, for this reason, they will continue to access commercial windows of multilateral institutions as well as Export Credit Arrangements (ECAs).

The government also intends to explore other sources of possible financing options, such as the Islamic financing instruments, Green bonds, Samurai and Panda bonds and diaspora bonds over the medium term.

These non-concessional and commercial loans will be limited to development projects with high financial and economic returns and in line with Vision 2030 and the Big Four plan.

Further, the government will ensure future loans from development partners have a grant element of 35 per cent to ensure sustainable level.