New IMF, World Bank loans trim Kenyas debt refinancing risks

Kenya’s change of tact to re-integrate cheap financing from the International Monetary Fund (IMF) and the World Bank has served to trim the country’s debt refinancing risks.

While the stock of debt over the past year has risen significantly, the average time to maturity (ATM) of the public debt portfolio has increased to 9.1 years from a lower 7.4 years two years ago.

This means that Kenya has more time to meet repayments on debt than before.

Last year, the National Treasury re-engaged funding from the International Monetary Fund (IMF) raising the share of concessional funding in the budget.

The average time to maturity for new external loans contracted to June 2020 rose to an average of 26.1 years with 7.4 years as grace period in contrast to 15.3 years and 5.6 years in 2019.

Meanwhile, the weighted average interest rate for new external debt declined from 3.9 per cent in June 2019 to 0.5 per cent in June 2020.

During this period, Kenya accessed in excess of Ksh.180 billion in new financing from the World Bank and the IMF.

“The improved borrowing terms reflect government preference for concessional and semi-concessional external financing sources,” the National Treasury stated in its 2021 Medium Term Debt Strategy (MTDS).

Domestically, the average time to maturity also improved to 6.3 years from 5.7 years as the government sought to lengthen the local debt maturity profile through the gradual reduction of short-timed Treasury bills (T-bills) and the implementation of a benchmark bond program.

Cumulatively, the share of debt maturing in one year as a percentage of total debt declined to 15.5 per cent beating an initial 17.1 per cent target while declining from a high of 27.4 per cent in 2018.

Kenya’s stock of debt however rose to Ksh.7.28 trillion at the end of December 2020 or an equivalent 65.6 per cent of GDP on the back of bloated debt taking.

The stock of debt comprises of Ksh.3.8 trillion in external and Ksh.3.5 trillion in domestic debt.

The National Treasury however says Kenya’s debt profile remains sustainable even as risks to its sustainability increase from widened fiscal deficits.

The exchequer for instance says the Ksh.9 trillion ceiling requires adjusting to cater for expanded fiscal deficits over the medium term.

“To accommodate fiscal deficits into the medium term, the statutory debt limit has to be expanded,” the National Treasury added.

According to the IMF Debt Sustainability Analysis Report (DSA) published in May, the present value (PV) of Kenya’s debt to GDP remains within the 55% threshold at 26.8 per cent last year and 27.6 per cent over the medium term to 2024.

Nevertheless, Kenya is above thresholds on debt to export ratios.

The National Treasury meanwhile expects the present value of debt to GDP to stick below the 70 per cent threshold peaking at 63.9 per cent in 2022.

Loans from multi-lateral lenders such as the IMF are priced at an average fixed rate of 0.75 per cent with a tenor of up to 50 years while concessional loans average 2 per cent in interest with up to 20 years to maturities.

In contrast, commercial loans/sovereign loans have shorter tenures with greater interest costs determined at market.

Kenya’s third Eurobond issued in 2019 for instance was priced at between seven and eight per cent while the tenure on the dual-tranche issue stood at seven and 12 years respectively.

The National Treasury says it will aim for an optimal strategy in minimizing costs and risks involved in public debt.

About 38.8 per cent of Kenya’s debt profile at the end of last year is concessional nature while semi-concessional and commercial debt stands at 30.4 and 30.7 per cent respectively.