By Dominic Omondi
Kenya’s debt service obligations have risen sharply to become the second-highest in Africa after
Ethiopia, a new report shows.
The report dubbed
African Development Outlook 2020
by the African Development Bank (AfDB) has however vouched for Kenya’s
economy to be less hurt by the Covid-19 pandemic due to its diversified
nature.
AfDB has projected the country’s Gross Domestic Product (GDP) to expand
by 1.4 per cent, a more optimistic projection than the International
Monetary Fund (IMF) projection of negative 0.3 per cent.
The World Bank has projected a growth of 1.5 per cent in the best-case-scenario, -1 per cent in the worst-case-scenario.
However, Kenyan authorities expect the economy to grow by around 2.5 per
cent this year. But the pandemic has aggravated Kenya’s debt
vulnerabilities with the country paying Sh20 for every Sh100 it earns
from its exports.
Ethiopia’s external debt payment as a share of export earnings is the highest in Africa at 25 per cent.
Containment measures aimed at curbing the spread of viral disease in
Europe and North America has seen the country earn less from its main
export products including flowers, tea and coffee.
Revenue from exports, the country’s main foreign exchange earner, are
essential indicators of a country’s capability to service its external
debts.
The debt is mostly denominated in foreign currencies. Besides export
earnings, a decline in diaspora remittances and tourism earnings also
denies the country foreign exchange, critical for payment of external
debt most of which is denominated in dollars.
Foreign direct investments also play a part in replenishing Kenya's foreign exchange reserves.
“High debt service obligations mean the government will face difficult
trade-offs during the crisis: whether to honour debt obligations or
spend domestically to contain and cushion the impacts of the Covid–19
pandemics,” reads part of the report by AfDB.
It adds that “the debt service moratorium granted by the African
Development Bank and other multilateral creditors is essential to
reconcile the dilemma while dealing with the outbreak.”
Kenya, which has not benefited from these debt moratorium, has however
dithered from taking up one offered by G-20, a club of rich countries,
fearing that such a move would affect its credit rating.
“The big push for infrastructure investments amid delayed returns
notably in terms of exports has also contributed to a deterioration in
debt sustainability as illustrated by Djibouti, Ethiopia and Kenya?.”
Afdb noted that the shift by most African countries towards expensive
commercial, foreign currency denominated debt, such as Eurobonds, only
made things worse for countries such as Kenya which have been
binge-borrowing non-concessional loans from private banks and
international capital markets.
A new report by Moody’s, a global rating agency, shows that liquidity
risks elevated for those governments like Kenya’s with sizeable payments
to private-sector creditors this year and next.
“Even for those with reliable access to financing, it will be
challenging for most to meet their financial needs at affordable rates,"
the report says.
"As a result, already weakening debt-affordability metrics
(interest/revenue) from falling revenue will be even weaker given higher
cost of debt this year, particularly in Angola, Nigeria and Kenya.”
However, things might have started getting better for Kenya after export
earnings and remittances in May and June started to improve, official
data shows.
Moreover, the flow of cheap loans from the IMF, the World Bank, Afdb and
other donor partners, has pushed the country’s foreign exchange
reserves to an 11-month high.
Kenya’s risk to debt distress, probability of defaulting, has been
reclassified to high from moderate by the IMF, following the adverse
effects of the pandemic.
However, Kenya is among the countries in Africa that are expected to
escape the dire effects of Covid-19 pandemic due to its diversified
economy.
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