Kenya borrowing expensively from Peter to pay Paul: report

Kenya is borrowing expensively from Peter to pay what it owes to Paul according to a new report.

Despite denials from the National Treasury that it only borrows for development projects, a new report tabled to Senate Standing Committee on Finance and Budget by the Office of the Controller of Budget (COB) has laid bare the mess.

For instance, the National Treasury is reported to have channeled 98 per cent of Ksh.15 billion Treasury bond proceeds towards syndicated loan payments last month.

About Ksh.14.7 billion was channeled towards the payment of syndicated loans to the Eastern and Southern Trade and Development Bank.

The balance meanwhile footed concessional loans to a coalition of lenders including the African Development Fund, the European Investment Bank (EIB) and the Export Import (EXIM) Bank of Korea.

Additionally, the report states that Treasury took Ksh.61.5 billion from Ksh.70.2 billion sovereign bond proceeds to pay up debt.

“This contravenes Article 20 c and section 15 (2) c of the Public Finance Management Act (PFMA) which states the national government’s borrowings shall be used only for the purpose of financing development expenditure and not for recurrent expenditure,” the report states.

More debt

The use of domestic credit to settle external loans is expected to lead to even more debt as the latter is usually the cheaper option.

Domestic credit is largely commercial and covers largely Treasury bills and bonds raised from local financial institutions such as banks and pension funds which traditionally attracts higher interest rates and an even shorter tenure.

According to data from the Central Bank of Kenya (CBK), terms on external loan contracts have been on the increase in recent years while the local Treasury yield curve has largely remained unchanged.

In the last fiscal year to June 2021 for instance, the average maturity of new external loans stood at 23.3 years and had a grace period on repayments averaging 7.4 years while attracting a 2.1 per cent average interest rate.

Meanwhile, an eight year timed Treasury bond (T-bond) costs the government more than eight per cent in interest.

This means that it is more expensive to borrow domestically than is to accumulate debt externally.

On the flip-side, the government would rather take external debt to refinance local maturities if it is to put a pause to runaway public debt growth.

At the moment however, the government is spending most of its money in debt repayment that it is using on any other services.

The COB report for instance shows the government will use 36.6 per cent of its current budget or Ksh.1.169 trillion on settling public debt.

Meanwhile 34.7 per cent of the budget or Ksh.1.107 will be swallowed by recurrent spending which includes the payment of salaries and wages leaving behind a mere 12.2 per cent or Ksh.389.2 billion for development projects.

This is however not the first time for the government to borrow from Peter to pay Paul.

Treasury has consistently taken out new Eurobond to settle balances on old Eurobonds.

The exchequer has for instance lined up nearly Ksh.800 billion in Eurobonds in the next two years.
Part of the proceeds will be used to clear Kenya’s inaugural Ksh.220 billion ($2 billion) taken in June 2014 and which matures in June of 2024.

Kenya’s recent Eurobond issue in June 2021 saw it take Ksh.110 billion ($1 billion) from the international capital markets.