Years after the West accused China of debt diplomacy for building expensive infrastructure like the Standard Gauge Railways, Lamu Port and power grids, the International Monetary Fund and the World Bank have taken over lending, doubling billion dollar loans to Kenya most of which have built little else than the country’s creditworthiness.
Over the last three years since the IMF raised alarm over Kenya’s debt distress, the multilateral lender together with the World Bank have risen to become the country’s foremost lenders and arguably the architects of the country’s tax and spending policies, taking over these sovereign roles.
The rate at which Kenya has been borrowing from the IMF has gotten Kenyans talking worried about the quantum of Kenya’s growing debt problem and the anticipated structural reforms built into such facilities that have required tough tax measures like the vat on fuel.
In April 2021, about 200,000 Kenyans signed an online petition bashing the IMF under #StopGivingKenyaLoans on Twitter while also asking it to stop giving more loans to Kenya.
But the uproar and displeasure with the IMF, fizzled out faster than it came up perhaps typical of Kenyans superficial interest in the economy after the ever-busy online buzz and conversation was taken over by other pressing matters like memes.
Lost in all this was the fact that authorities in Nairobi had little or no option but to turn to the IMF and other Bretton Woods institutions to navigate Kenya out of a huge debt burden that is turning her into a slave of global creditors.
I have lived in this country long enough to learn that the more things change, the more they remain the same.
On Thursday, June 1st, Kenya will be marking 60 years since attaining internal self-rule from the British. Over these six decades Kenya has built a Kes15.2 trillion economy out of which Kenya has borrowed Kes9.3 trillion in debt, essentially meaning creditors own 61 percent of all the goods and services produced within the territory.
But is not just the quantum of debt that is a problem, the cost of servicing these loans is growing so rapidly taking up revenues leaving very little to keep the government running or spending on public goods like education health and security.
Therefore, with big loans to pay from a Treasury running on empty, the country has had to forget ‘self-rule’ and defer decision making to technical teams of our old masters from the West to provide both policy and financial aid prescriptions for the country.
With current and future fiscal and debt repayment risks, Kenya’s begging bowl seems to have a permanent office in Washington D.C. And the new masters are not about to disappoint Nairobi.
To tackle the Covid-19-induced economic hit, Kenya turned to the open arms of the IMF, the World Bank, and the African Development Bank for concessional loans. The pandemic years 2020-22 became very defining to the country’s debt dynamics.
In April 2021, Kenya started a 38-month IMF programme running until mid-next year that will see Nairobi access at least $2.34 billion in credit financing.
This July, the IMF management and Executive Board are set to consider and approve an agreement that would see Kenya get US$410 million, bringing the gross IMF Support under the Extended Fund Facility and Extended Credit Facility plan to $2.017 billion.
This programme has a running theme: strengthening fiscal and debt management ability for the country.
“I suspect because of the SDR-dollar rate has moved higher from the time we entered into this program, and also the fact that the Kenya shilling-dollar rate has trended to where it is, then in Kenya shillings terms, the amount of money we will receive will be higher than what was envisaged in the start of the program,” notes IC Asset Managers Economist, Churchill Ogutu.
Over the period, statistics show the country’s budget deficit eased from 7.8 percent of GDP in FY2020/21 to 7.3 percent of GDP in FY2021/22 and is projected to drop further to 5.8 percent of GDP in FY2022/23. The net impact of this trajectory is a significant cut in Kenya spending that has seen roads stall and state projects turning into white elephants.
But it had to take strict IMF bureaucrats to get politicians to tame their appetite for debt and to start drafting a sustainable budget, a goal that President William Ruto’s administration seeks to meet.
One doesn’t have to look far to understand why the President is keen on suppressing Kenya’s appetite for debt. Loans contracted by policymakers in Nairobi from multilateral creditors surged from US$13.7 billion in 2020, to US$17.9 billion in 2022.
In the period, however, Kenya’s bilateral debt decreased to about US$9.8 billion last year largely attributable to the drying up of financing wells in China. Kenya-China bilateral debt hit a historic high of $7 billion in 2021 but has been on a general decline on appraising the viability of projects financed and geopolitical shift of Kenya’s current regime preferring the West.
Whether Kenya continues resisting overtures from China, given Beijing’s charm offensive in financing projects across Africa remains to be seen.
“I would not be surprised if he (President Ruto) would be flying out to Beijing within the next months. The question is what would be the price for that? I think there is potential for renewed financing but I know China is in general cutting back exposure to frontier markets including African markets,” REDD Intelligence Senior Analyst, Mark Bohlund notes.
In the period, Kenya also saw its commercial debt dip to US$10.1 billion, even after snapping a new US$1 billion Eurobond in mid-2021 that was trading at a 6.3 percent coupon.
The country’s commercial debt would have hit a record high in mid-2022 if a new Eurobond issuance had gone ahead. Policymakers in Nairobi were, however, discouraged following a sharp spike in the average yield on existing bonds to 14.7 percent in June 2022 from 6.7 percent early last year.
One of the biggest consequences of Kenya’s inability to borrow in the markets has been the erosion of the country’s forex reserves held by the Central Bank of Kenya.
According to CBK, Kenya’s forex buffer has been teetering on dangerous territory from US$8.9 billion, about 5.3 months of import cover, in January last year to US$7.5 billion or 4.2 months of import cover in November.
The country’s dependence on foreign dollar masters showed in December when forex reserves rose to US$8 billion (3.9 months of import) following the receipt of a US$447 million IMF loan at the time to ease fiscal constraints. At US$6.4 billion currently, Kenya’s reserves are just 3.60 months of import cover, which is below CBK’s desired target.
Beyond seesawing forex reserves at just above the IMF recommendation of three months of import cover another challenge has been the declining strength of the shilling against the major world currencies in the period. And this has the effect of piling inflationary pressures through high debt-serving costs and strained markets given that Kenya is a net importer.
To cool the pressure on forex reserves, Kenya has entered into a fuel import agreement with Saudi Arabia and the UAE to purchase oil on credit terms with the bill falling due after six months. Fuel accounts for one of the biggest demands for dollars in the country.
As China cut its exposure in African markets as it battled economic fallout during Covid, Kenya had little option but to get another suitor.
The country experienced a sharp uptick in loans from the World Bank hitting US$10.7 billion at the end of last year from US$7.2 billion in December 2019. As we toast to 60 years of internal self-rule, the Washington-based World Bank is Kenya’s single largest creditor, effectively edging out China since 2019 just before the pandemic.
In April last year, the World Bank provided about US$750 million for budgetary support, and the global lender’s support was expected to rise to US$1 billion by June this year.
Overall, Kenya’s total public debt hit a record 68 percent of GDP according to CBK data at the height of Covid in 2020, before easing during FY2021‑22 on account of a narrower budget deficit.
Fast forward to 2024 and the road ahead looks very bumpy given the obligation for Kenya to pay maturing $2 billion Eurobond.
“Now the question is, how much support do we require and if you take the bullet payment coming up next year June, $2 billion unless there is some kind of quasi-guarantee from the IMF or the World Bank, I think it’s going to be very difficult for us to raise that money. I estimate that we need $6 – $7 billion between now and that bullet repayment,” explains Financial Markets Analyst, Aly-Khan Satchu.