Fed rate hikes to raise credit cost

The National Treasury building in Nairobi. FILE PHOTO | NMG 

By PATRICK ALUSHULA
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Hikes in Federal Reserve interest rate benchmark and pressure on the shilling may see Kenya borrow expensively to finance relatively cheap debt, a senior research economist at Commercial Bank of Africa (CBA) has said.

Speaking at an economic forum to discuss how the country can achieve growth amid fiscal imbalances, Faith Atiti said the fact that US interest rates have cumulatively gone up by 200 basis points in the recent past means the cost for future borrowing is also set to rise.

Kenya’s $750 million (Sh76 billion) Eurobond priced at 5.875 percent matures in June, which puts pressure on National Treasury to get a loan to finance operations as well as pay off maturing obligations.

“As we think of going back to the Eurobond market to sort of roll over these facilities, it actually means we will be refinancing cheaper debt with more expensive debts. This further complicates our debt dynamics,” said Ms Atiti.

She said Kenya may have to think about restructuring these debts to get some flexibility in repayment, just as is being contemplated by countries such as Rwanda.

The country is expected to spend about Sh100 billion in interest payments on foreign loans and pay off maturing debts estimated at Sh380 billion in the current financial year.

According to Ms Awiti, the talk of global recession offers some relief to Kenya since central banks may offer limited scope for interest rate increase.

She added that the risk of the shilling weakening could add more pressure to the Treasury despite the current attempt to rein in expenditures.

“We are still running a wide deficit despite the talk of fiscal consolidation. There is still a big portion of financing that is required from external market,” she adds.

The Treasury’s effort to cut on borrowing has been complicated by underperforming local revenue collection. External borrowing target for the current fiscal year has been increased by Sh34 billion to Sh321.5 billion, on account of missed tax revenue targets in the first five months.