The cost of saving Kenya from default
As Kenya unveils its most radical finance Bill in years that rolls back controversial fuel tax relief, taxing the rich at a higher band of 35 percent and going for the poorest businesses making about Kes1,400 a day or Kes500,000 per year to pay turnover tax, the International Monetary Fund (IMF) staff team that will land in Nairobi this week is likely to be very pleased.
Kenya looks to have secured the commitment for stronger IMF support from the lender’s managing director Kristalina Georgieva during her visit last week, in part of President William Ruto’s three-pronged approach to steer the country from a disastrous restructuring of its debts.
The IMF Chief tweeted the multilateral lender ‘stands with Kenya’ and later told reporters “Kenya is a case of innocent bystander. It has been hit by external shocks” and that “the government can raise money from sources including syndicated loans and the IMF” to avoid any defaults.
IMF staff team is expected in Kenya this week in the latest review of the $2.4 billion program, which is expected to unlock billions this month after a board approval later in the month. Analysts say the latest review on the support to Kenya is likely to deliver a larger loan than anticipated just like it happened in December last year when Kenya got additional support.
Kenya in February 2021 signed a 38-month IMF program worth $2.34 billion that was increased to $2.416 billion after the two sides agreed to on an increment last year to cover external financing needs on droughts and challenging global markets. The World Bank enhanced Kenya’s loan kitty by Kes32.3 billion ($250 million) bringing the expected disbursement from its Development Policy Operations (DPO) facility to Kes129 billion
But according to two debt risk consultants, who have been involved in several African Eurobonds, Robert Besseling, CEO, Pangea-Risk and Faisal Khan, Managing Partner, Acre Impact Capital, these extra resources will be used to pay off domestic debts, offering the first step in saving Kenya from what they call a “chaotic and untransparent defaults, such as those of Zambia in 2020 and Mozambique in 2016, which triggered financial crises, years of divestment, and a collapse in investor trust”.
“The bulk of IMF disbursements to Kenya are being allocated to debt servicing, which now accounts for almost half of state revenue,” the analysts say in a white paper The Politics of African Debt Restructuring.
Unlike Rwanda that prepared for its Eurobond by taking a cheaper loan in 2021 to repay part of the debt and used special drawing rights it received in 2021 to pay the rest of it, Kenya has flown in blind leaving investors guessing it may be headed the Ghana way, of default.
An analyst with knowledge of Kenya’s Eurobond deals says this is not a fair comparison because unlike Ghana, which by last year was negotiating a programme with the IMF and did not have access to their loans sending them to print money and push up inflation, Kenya is already under a programme with access to loans from both World Bank and IMF. Kenya may also return to the market when the US Fed has halted hiking of interest rates and hence refinance its Eurobond.
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Kenya has a bond repayment bill of almost $3 billion for the next five years. The country may opt to issue a Eurobond with a different tenor and structured in two or three tranches to manage next year’s maturity of its maiden $2 billion, 2014 bond.
But even with this assurance the market has not been convinced looking the growing desperation of the government struggling to pay salaries, raise extra revenues amid political chaos and the inflationary pressures of currency devaluation.
Kenya’s shilling is falling like a stone, 28.4 percent since the IMF revealed the country’s chances of default were high and no amount of Central Bank of Kenya bluffing the market could stop this decline. It is unclear where the currency will settle given the regulatory sanctions that scuttled analyst predictions which used to provide the market with informed analysis; this enforced opacity that was extended into the market that almost turned currency in Kenya into a black market trade.
But as the currency falls, Kenya’s debt continues to grow rapidly with projections that the debt service cost could more than double to $17billion in four years, and in 2023 Kenya would be paying $27 million in debt interest every day.
The government hopes to slow the decline of the shilling through a credit deal to import oil and delay dollar demand, higher inflows from the IMF, syndicated loans and other multilateral lenders that would allow the government to switch bonds into longer term bonds.
If only it were as easy. The prices of everything in the country have been soaring and many differ on what is causing this and how to tackle it. The government as Prof Njuguna Ndungu has kept reiterating believes it is a supply problem something that just needs good weather and working markets instead of raising rates trying to limit demand.
The Central Bank of Kenya governor Dr Patrick Njoroge has differed in his approach moving to cut demand by hiking interest rates worried more with the damage inflation can cause in an economy, vulnerable to exchange rate shocks. Even as analysts projected that the MPC will hike rates slowly, just like other African countries dealing with imported inflation from the dollar, Dr Njoroge went for a jumbo rate shaking the market with a by 75 basis points Central Bank Rate hike to 9.5 percent, a level last seen five years ago.
Since CBK imposed a jumbo rate hike in March all bonds issued have performed dismally as banks stay away from long term bonds demanding a higher return on government paper, disrupting Treasury plans for lengthening maturities at lower costs.
An infrastructure bond in early March yielded 119.5 percent performance rate but a reopened infrastructure bond later in the month only yielded 64 percent participation. Participation fell to 17.8 percent in April and down to 14.3 percent before the Central bank of Kenya cancelled a 30 year bond after receiving only Kes7.3 billion bids of which only Kes1.7 billion could be taken up.
In the ensuing game of who will blink fast, the market knows Kenya has a dollar problem in a very volatile external markets. Mr Robert and Khan say Prof Ndung’u now more than ever needs the IMF and their dollar loans to navigate Kenya off the cliff.
“Firstly, new Finance Minister Njuguna Ndung’u has laid out a proposal for the country to shift towards concessionary borrowing at low or zero interest rates to retire unaffordable domestic loans. The cost of domestic debt this year has surged even higher as interest rates have been hiked through 2022 and are set to increase even further into 2023. To address this problem, Ndung’u has proposed to retire some of the most expensive domestic loans by using revenue from new concessional loans from multilaterals lenders like the World Bank and the African Development Bank,” the debt risk consultants say.
Under President William Ruto, Kenya has reaffirmed its position in the old global order aligning closely with the west. Dr Ruto has voided a state directive that gave Chinese built Standard Gauge Railway (SGR) operator Afristar monopoly in transporting goods from the port and has disclosed some of the debt deals with the Chinese. It is not surprising that China’s loans for President William Ruto’s first full-year budget will be the smallest in 16 years.
Kenya’s shift to the west amid IMF support can be seen as political influence through debt diplomacy, the very crime the west has been accusing China for years. After two decades of Chinese dominance in Kenya’s infrastructure led debt accumulation, the World Bank and IMF loans to Kenya have increased over the last three of years replacing the Chinese.
But for Kenya to actually save itself from its debt crisis, it needs the Chinese restructure the Export-Import Bank of China (Eximbank) loans that were used to fund the construction of the SGR.
Kenya’s most expensive infrastructure project, the SGR has not broken even with the state directive that guaranteed it import cargo, it made colossal losses of up to Kes33.3 billion over the last five years on high operations costs, cargo discounts which might increase on competition from road transport.
China has shown greater willingness to reprofile its loans, and offered limited debt relief since 2019, and Kenya hopes to get away with fines for defaults rather than missing Eurobond payments which will be public and punishing at credit ratings.
Mr Robert and Khan say it is a common play in the continent where at least six African countries are suspected to have defaulted on Chinese loans since 2016, including Kenya, Ethiopia, Djibouti, Mozambique, Zambia, and Ghana. In comparison, only three African countries have defaulted on their Eurobond coupon payments over the same period, namely Mozambique (2017), Zambia (2020), and Ghana (2023) and it has been painful.
But even as Kenya gambles with the geopolitics of the world in a time of war, local politics and fight for resources are a constant thorn in a country with limited resources and whose productivity is beginning to slow down. Kenya National Bureau of Statistics (KNBS) data shows the economy grew by 4.8 percent in 2022, down from 7.6 percent with only four sectors expanding by double digits compared to seven in 2021.
As resources diminish the huge fight over political appointments has turned exclusionary with the Deputy President Rigathi Gachagua metaphorically referring to bureaucratic positions as shares bought by the network of politicians who represent the will of just 7 million voters out of the 57 million Kenyans. And as justle for political seats gets, tribal, political and strategic, President Ruto has carefully picked the heads of state corporations he will need to facilitate the third strategy to pull the country out of debt, selling its assets.
Mr Robert and Khan says Kenya plans to partially privatise at least ten state-owned companies by selling shares on the local bourse including Kenya Ports Authority and the Kenya Pipeline Company. The debt consultants also name Kengen, NHIF, Ketraco, Kenya Power, Kenya Railways, East African Portland, National Oil and ICDC most of whose have had their management changed by President Ruto.
The President also backed a push to sell parastatals without the approval of Parliament, in a law change that will give the Treasury unchecked powers in the privatisation plan with his Cabinet approving the Privatisation Bill, 2023, that gives power to the National Treasury to privatise public-owned enterprises without the approval of Parliament, describing an early process seeking the legislators’ nod as “bureaucratic.”
While President Ruto moves might save the country from a messy default, it is bound to get intertwined in global politics of war and resource fights at home at a time when resources are diminishing and prices are rising. As the government moves to meet IMF conditions like tax increases, they must watch inflation, for it is the true cost of Kenya’s debt burden.
