Kenya’s commercial debt has grown by 750 percent for the last 10 years

Kenya’s appetite for commercial debt grew by over eight times or an equivalent 750 percent in a decade from June 2010 to March 2020.­

The data contained in a presentation by the Public Debt Management Office (PDMO) to the National Treasury underlines the results of years of bloated borrowing by government which now leaves the country facing elevated costs of debt servicing.

Over the period the country’s overall debt stock has grown to Ksh.6.3 trillion ($59 billion) or an equivalent 60 percent of Gross Domestic Product GDP from Ksh.1.2 trillion back in 2010.

Meanwhile, the stock of foreign currency debt has risen to Ksh.3.2 trillion from Ksh.569.1 billion while shilling denominated local debt stands at Ksh.3.1 trillion from Ksh.660.3 billion.

Kenya’s present budget hole/deficit is estimated at Ksh.657.4 billion from Ksh.163 billion a decade ago with the deficiency being filled by Ksh.353.5 billion in external lending and Ksh.303.9 billion in domestic borrowing.

The pressure on debt servicing is evident in interest payments which presently represent 24 percent of ordinary revenues or Ksh.441.4 billion from Ksh.63.6 billion in June 2010.

Interest payments for domestic debt still account for the sizable redemption at Ksh.290.5 billion versus Ksh.150.9 billion in foreign debt interest settlement.

No checks

The debt structure has also evolved over the past 10 years with commercial debt now representing 34 percent of Kenya’s debt stock from a negligible four percent a decade earlier.

Debt from multilateral sourcing has shrunk by half from 66 percent to 33 percent while bilateral debt has remained relatively flat at 33 percent from 30 percent.

The Public Debt Management Office (PDMO) has criticized the country’s previous debt management strategy for breaches to modalities on debt management prescribed under both the Constitution of Kenya and the Public Finance Management (PFM) Act.

According to the office which falls under the National Treasury, the government has continued to remain numb to swelling debt complexities and has only made rare mentions to confront the issue when prompted.

“Despite the significant growth and complexity of public debt, there has been no formal/documented public policy on the management of public debt,” the PDMO notes.

“The Kenyan government has relied on ad hoc public debt policy pronouncements.”

Years of carefree borrowing

The high stock of commercial debt largely traces its roots to the Eurobond craze that saw Kenya make its premier in the international commercial debt market back in 2014 as highlighted in the recent country assessment by the International Monetary Fund (IMF).

During its June 2014 debut, Kenya realised Ksh.213 billion ($2 billion) in its first Eurobond issue. The sale was quickly followed up with a Ksh.80 billion ($750 million) tap sale in December of the same year.

The issue was then followed up in 2018 and 2019 with twin bonds which raised a combined Ksh.436.7 billion ($4.1 billion).

In between time, the government shored up its appetite for debt with syndicated loans worth Ksh.239.6 billion ($2.25 billion) with part of the funds acquired serving a refinancing purpose.

According to the IMF, one third of Kenya’s Ksh.3.2 trillion external debt stock is now commercial. At the end of 2012, commercial debt to external creditors made up for a mere Ksh.58.9 billion, today, the stock is up to Ksh.1 trillion.

Commercial debt attracts higher interest rates and is responsible for the packed pressure on debt servicing.

At the end of 2019, the country’s debt servicing ratio to revenues showed the pressure as it stood at 45.2 percent from 29.9 percent in 2013 breaching the 30 percent Public Finance Management (PFM) rules.

In essence, 49 cents of each shilling of revenues collected now go to repay debt.

The accumulation of commercial debt was coincidentally parallel to the absence of a fully constituted PDMO even as multiple media reported of a fall out between the office and the then Treasury Cabinet Secretary Henry Rotich.

Redemption

The new regime at the Planning Ministry is now hinging its success in taming run away date into the reconstitution of a new public debt and borrowing policy.

The policy whose draft was first published in November 2019 after a consultative process involving multiple stakeholders among them the Central Bank of Kenya (CBK) and the Parliamentary Budget Office (PBO) earned cabinet approval on March 23.

The PDMO expects to disseminate the policy to stakeholders including the public by the end of 2020.

Other timelines to effectively reconfigure debt management include staffing the PDMO, the signing of a performance contract between the Cabinet Secretary of the Treasury and the debt office and the realignment of PDMO functions.

Highlights of the new policy include the establishment of a public debt registry, the broadening of the debt office role and the review of procedures on borrowing.