IMF okays Kenya plan for Sh500b Eurobond

By Dominic Omondi

International Monetary Fund (IMF) logo. [Reuters]

The International Monetary Fund (IMF) has endorsed Kenya’s plan to borrow Eurobond loans of up to

Sh508 billion, which President Uhuru Kenyatta’s government plans to use to repay other expensive loans.

Besides using the money to rollover maturing loans, Kenya is also expected to use this cash to fund high-yielding infrastructure projects in what is aimed at preventing a repeat of the speculation that surrounded the first Eurobond.

IMF said this in a detailed report on the Sh253 billion credit facility that has far-reaching effects, including increasing taxes and cutting spending to reduce debt levels. The programme will run over the next 38 months. 

“The borrowing plan under the programme allows for another $5 billion (Sh508 billion) Eurobond issuance to be used exclusively for debt management operations, which could include a refinancing of the 2024 Eurobond and retiring of relatively expensive syndicated loans,” said the IMF in the report.

This adds to the debt burden, which is expected to hit over Sh10 trillion by the time President Uhuru Kenyatta’s last budget is implemented by the end of June 2023. There are plans to raise the debt ceiling from the current Sh9 trillion.

Kenya, said the IMF, did not have the headroom to take more commercial loans such as Eurobond and syndicated loans from commercial banks.

However, Kenyan authorities from the National Treasury and the Central Bank of Kenya (CBK), the IMF explained, have requested to be allowed to take on expensive loans for project financing and debt management operations.

While agreeing to Kenya’s request, IMF insisted that the funds be used to “finance projects that are critical for Kenya’s development strategy and have high economic and social returns and for which concessional financing is not available.”

Additionally, the money can be used for liability management operations, for example, repaying other expensive external loans as they mature, which some analysts fear amounts to using an expensive loan to repay another expensive loan.

This comes at a time when the public anger over the Government’s runaway debt spilled over to the social media pages of the Washington-based institution, with some petitioning the IMF to withhold the loan until the Government shows how it has spent its previous loans.

Analysts have, however, described the petition as an exercise in futility, as cancelling loans might grind the country to a halt. However, Dr Joy Kiiru, an economics lecturer at the University of Nairobi, requested Kenyans to use this opportunity to keep the Government on toes.

However, the IMF, a kind of a mortician that is called upon when a country’s health is in its worst state, has given Kenya serious conditions for its loans, which will be disbursed every six months of review. Part of the conditions is for the country to increase its tax revenues, reduce wasteful spending and reduce debt.

National Treasury, which has insisted it will only go after concessional loans to reduce the debt service costs, had already indicated that it will issue a Eurobond should it not get enough cheap loans from multilateral lenders such as the IMF, World Bank, and African Development Bank.

Kenya’s share of commercial loans, which had risen to Sh1 trillion by end of 2019, declined last year as the country received a lot of cheap credit.

So far, Kenya has borrowed over Sh1 trillion of commercial loans, a big chunk of which is sovereign bonds denominated in US dollars. Treasury jumped into international financial markets after rebasing its economy to become a low middle-income country. Unlike the least developed countries (LDCs), cheap loans do not flow freely to middle-income countries. 

Eurobonds and other commercial loans are expensive, with high-interest rates of up to eight per cent. They also have shorter or no grace periods and shorter repayment periods. This, coupled with reports that most of these expensive loans have been pumped into low-yielding projects, has seen debt service costs spike dramatically.

By end of February, for every Sh100 that Treasury earned from taxes, loans, and even grants, Sh38 went to repaying debts. Another Sh38 went into salaries and other administrative costs by ministries.