A Section of Southern bypass in Nairobi in this picture taken on
September 9, 2015. The road was constructed with funding from China’s
Exim Bank and the Government of Kenya. In the past decade, Kenya has
relied on Chinese loans to fund its infrastructure projects. PHOTO |
EVANS HABIL
By ALLAN OLINGO
In Summary
- The current loan deal with China is three times what the country received from the Asian nation in 2015 for its development expenditure, raising questions over the country’s debt sustainability.
- This is the country’s second international loan in the current financial year, after a $750 million syndicated loan taken in October last year.
- Documents from Treasury show that Kenya will in the 2015/16 financial year pay $23.4 million as principal and $46 million as interest on its Chinese loans, with the debt burden expected to grow to $161 million in the next two years.
Kenya is seeking a $600 million loan from China, pushing to
$1.35 billion the debt it has picked up this financial year from its two
international loans, as it seeks to bridge a budget deficit.
The current loan deal with China is three times what the country
received from the Asian nation in 2015 for its development expenditure,
raising questions over the country’s debt sustainability.
National Treasury Principal Secretary Kamau Thugge said Nairobi
was finalising the deal with Beijing, but the details and terms would be
provided later.
“We expect these funds to come in any time now to finance the
budget deficit in the current fiscal year. We expect this loan to reduce
the country’s local borrowing. Therefore, we expect pressures on
domestic interest rates to also come down,” said Dr Thugge.
This is the country’s second international loan in the current
financial year, after a $750 million syndicated loan taken in October
last year. The loan, arranged through CfC Stanbic, Standard Chartered
and Citi was also meant to plug the gaping $6 billion deficit in the
budget, which has been worsened by missed revenue targets.
The country anticipates a budget deficit of 6.9 per cent of GDP
in the 2016/17 fiscal year, compared with 8.1 per cent in the 2015/16
financial year. In its Budget Policy Statement released in February,
Treasury revised downwards its domestic borrowing target to $1.7
billion, from $2.2 billion.
Infrastructure projects
In the past decade, Kenya has relied on Chinese loans to fund
its infrastructure projects. Last month, the World Bank warned that the
country’s growing appetite for Chinese loans risked hurting the economy
due to the huge debt repayment burden.
Apurva Sanghi, the World Bank lead economist for Kenya, Rwanda
and Ethiopia said that China’s loans to Kenya had grown by 54 per cent a
year in the past four years, with some having high interest rates.
“China’s loans come with attractive interest rates and without
strings attached for good governance. The loans, however, could harm
Kenya in the long-run because of their lack of transparency and failure
to tie aid to key governance reforms. Some of China’s loans are also
non-concessional, which can raise debt-to-GDP levels quickly,” said Mr
Sanghi.
Documents from Treasury show that Kenya will in the 2015/16
financial year pay $23.4 million as principal and $46 million as
interest on its Chinese loans, with the debt burden expected to grow to
$161 million in the next two years.
In the 2014/15 financial year, Kenya received $200.6 million
from China in loans for development expenditure. China gave $120 million
to the Ministry of Energy and Petroleum that included the large
geothermal loans from China Exim Bank, $56 million to the Ministry of
Transport and Infrastructure, and $25 million to the Ministry of
Information, Communications and Technology (ICT)
The Chinese loan comes barely after Kenya borrowed $832
million from the domestic market between February 25 and the start of
this month in a bid to knock off its more expensive issuances that were
taken in quarter three last year. Currently, the government bonds due in
the next three months stand at $510 million.
The government uses redemption to refinance itself. Redemption
is when the government goes back to the market to get new debt to cover
those that have matured.
Domestic debt
Data from the Central Bank of Kenya (CBK) shows that the
country’s domestic debt rose to $16.46 billion between February 26 and
mid this month, from $15.31 billion at the start of the year.
Treasury bills have gone up since the start of last month to
stand at $4.72 billion, while the stock of domestic debt held in
Treasury bonds is up by $226 million. The Treasury’s overdraft at the
CBK has also increased by $70 million over the same period.
The rate of growth of the debt is, however, likely to slow down
considering that there will be T-bill and bond redemptions worth $1.27
billion in the second quarter of this year coupled with the negative
revision of the government borrowing target.
Genghis Capital fixed income analyst Vinita Kotedia said that
the Treasury currently has minimal pressures to borrow from the domestic
market.
“The new borrowing as at mid this month stands at $1.72 billion
and bearing in mind that the government needs to borrow approximately
$1.8 billion or approximately $451 million every month after taking into
account the net redemptions for the remaining part of the 2015/16
fiscal year,” said Ms Kotedia.
Eric Musau, a fixed income analyst at Standard Investment Bank
said that the increase in the domestic debt is not necessarily unusual
but could be explained through issues are playing around this spike.
“It is important to look at whether it’s the government looking
at additional funding or is it partly matching the maturities coming up,
or other subsequent large offers,” Mr Musau said adding that the
Central bank reopened two bonds worth $500 million in February creating
the increase in the domestic debt.
Shortfall
“If there is a shortfall, especially in terms of revenue
collections, then the Treasury will request the central bank to get into
the market to borrow. These bonds are where the money came from. We are
also seeing the maturity of some of these bonds within the near here
months. The way government tries to manage its cash see them looking at
which debt is coming up in terms of maturities vis a vis the demand by
government,” Mr Musau said.
Investors are also rushing to lock in higher rates as the yields
on government securities continue trending down due to high liquidity
in the money markets and the revised borrowing target
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