IMF raises Kenya’s debt risk to medium but remains cautious

The International Monetary Fund has raised Kenya’s debt risk to moderate, citing the country’s increasing refinancing risks and tighter safety margins.

In its latest staff review released last Tuesday, the Washington-based lender estimates that East Africa’s largest economy will see its total public debt peak at 63.2 per cent of GDP this year before gradually declining to 58.2 per cent next year.

Public debt was 58 per cent last year and 53.2 per cent in 2016, with the rise attributed to acceleration of infrastructure projects over the past four years.

“The higher level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly one-fifth of revenue, placing Kenya in the top quartile among its peers,” the IMF said.

According to Fund’s World Economic Outlook, Mozambique, Ghana, Zimbabwe and Sudan are among the continents top countries with a higher debt load.

Within the Comesa region, South Sudan and Zambia rank as the highest, with a fast growing debt load that has risen by 271.6 per cent and 220 per cent change respectively in the past six years.

Debt load

The Bretton-Woods institution is urging Nairobi to opt for concessional loans to refinance its debt as opposed to commercial credit, which would allow it to stretch maturities.

Kenya, which plans to borrow a further $3 billion in the financial year, according to the Treasury, will spend the highest amount in the region — $8.6 billion — on debt repayments in the 2018/19 financial year.

The government wants the Kenya Revenue Authority to collect $17.21 billion in the 2018/19 financial year, with half of it going to repay the country’s growing debt, which hit $45.20 billion as at the end of last year.

Nairobi will also see its domestic debt repayments rise by more than 40 per cent to $5 billion in the 2018/19 financial year, from $3.64 billion in the 2017/18 financial year, while its external debt will rise to $3.6 billion, from $2.37 billion currently.

The National Treasury’s 2018 annual debt management report shows that $14.7 billion or 71.7 per cent of the country’s external debt stock of $24.3 billion was denominated in dollars by the end of June.

This was up from 32.3 per cent or $8.4 billion in 2013.

Rollover options

The country is however enjoying rollover options, which has seen more than $10 billion in the 2017/18 year rolled over, but this will put pressure on the Treasury as World Bank and IMF sound the alarm over the country’s debt sustainability status.

The IMF has urged Kenya’s Treasury and Central Bank to reduce fiscal deficit to stem debt sustainability by either repealing or significantly modifying interest rate controls, and bringing in measures to strengthen the financial sector and improve the business environment.

“We encourage the authorities to repeal or significantly modify interest rate controls, noting that the controls have slowed growth, reduced access to finance, and hampered the effectiveness of monetary policy.

“Any modification should include the removal of the link between the lending rate cap and the central bank policy rate, the removal of a floor on deposit rates, and an increase of the lending cap to a level that protects consumers from predatory practices,” the IMF said.

“We applaud Nairobi on its ambitious plans for fiscal adjustment in 2017-2018 and 2018-2019 and the size of the adjustment would help put the public debt ratio on a downward path.

“Adjustment efforts should focus on both expenditures and revenues to preserve space for planned growth‑enhancing public investment and key social programmes,” the report added.

External shocks

Kenya is also under pressure to formulate additional steps to meet the deficit targets for both 2017/18 and 2018/19, with with an emphasis on realistic revenue projections to increase fiscal transparency.

The Central Bank of Kenya was also lauded for its move to create an interest rate corridor, which IMF said would help align the policy rate with the interbank market rate, thus improving the policy rate’s signalling role and strengthening the effectiveness of monetary policy.

The lender also said that Nairobi’s medium-term growth prospects remain favourable, supported by infrastructure investment and an improving business environment.

However, continued strong growth and macroeconomic stability hinge on the implementation of reforms.

“In addition, headwinds from fiscal consolidation and weak credit growth will weigh on economic activity in the near term. Kenya also remains vulnerable to a deterioration of security conditions, and to external shocks that could spur capital outflows, such as a pullback on investors from emerging markets or tightening global monetary conditions,” said the IMF.