Economy at risk over debt repayments, warns IMF

Kenya is one of the countries that may face a financial crisis if it does not manage its debt well, a global lender has warned.

This is if it does not get better tools to help manage the repayment of its commercial loans.

The International Monetary Fund (IMF), in its latest report, cited Kenya and Uganda as some of the countries in the region vulnerable to currency and interest rate risks, especially if they do not improve their debt management frameworks.

“This entails strengthening capacity to undertake a cost-risk analysis of borrowing options and manage repayments on commercial borrowing (Kenya, Uganda),” read IMF regional economic outlook for Sub-Saharan Africa report released yesterday.

Kenya’s debt stock comprises a huge chunk of the expensive commercial loans with shorter maturity periods.

Repayment of the loans is piling pressure on income from taxes and exports. Of the Sh250 billion external debt that Kenya is expected to redeem in the Financial Year 2018/19, a large fraction (74 per cent) is commercial loan repayment of Sh185 billion.

The redemption will include part repayment of the Sh275 billion Eurobond the country issued in 2015. Others include three syndicated loans.

With Kenya expected to pay off such a massive amount of external debt in foreign currency, the country will be forced to go back to the market, probably issue another Eurobond, to offset the maturing loans, what is technically known as refinancing.

The risk with such a huge dollar-denominated debt is that a slight weakening of the local currency is sufficient to increase the size of the debt, making it difficult for the country to meet its obligations.

Treasury might take solace in the fact that the Shilling has remained stable in the recent times - trading at Sh100 against the dollar. The World Bank recently put Treasury on the spot over the management of Kenya's debt.

In its report, the World Bank found that Kenya’s score on the sub-cluster of debt management declined by 0.5 to four last year from 4.5 in 2016.

Weak capacity

The global lender cited weak capacity of Treasury’s debt management office and failure to implement the strategy.

It noted that without adequate staff and clear leadership and accountability, the office faced challenges in carrying out its work.

Treasury, according to the bank, has been dragging its feet, with the implementation of reforms to strengthen the debt strategy pending for several years.

Treasury insists despite the country’s total debt stock crossing the Sh5 trillion mark, it is still sustainable.

“Increasing the issuance of domestic borrowing mitigates against the exchange rate risk, but the high-interest rates associated with it will be offset by increasing the size of borrowing through semi-concessional loans leading to a lower interest cost overall,” said Treasury in the medium-term debt management strategy for the FY 2018/19 and 2020/2021.

Treasury says in the near-to-medium term, redemption profile is dominated by domestic repayments and external commercial debt maturing during FY 2018/19 and the medium term.

The IMF, however, lauded Kenya for updating its medium-term strategy to deal with such unforeseen risks.

It said cost-risk analysis in nations such as Kenya had helped increase awareness of debt portfolio risks and assisted in the development of Government securities markets.