24 October 2017

Kenya: Looming Risks as Kenya, Tanzania Debt Levels on the Rise

Kenya took on more than $7.6 billion in debt over the past year to June 2017 as the country faced low growth prospects as a result of drought and a political impasse.

In the same period, Tanzania's debt rose by $1.12 billion. The country's external debt stock increased from $17.73 billion in the preceding quarter to $18.49 billion in June, largely on account of new disbursements.

Domestic debt increased by $358.62 million over the quarter to $5.2 billion at the end of June 2017.

"Central government borrowing from the banking system declined by 21 per cent in net terms, compared with an increase of 41.1 per cent in the year ending June 2016. This reflects building-up of government deposits at the Bank of Tanzania, following improvement in domestic revenue collection, streamlined expenditure and realisation of non-concessional borrowing," the Bank of Tanzania said in its second quarter report.

Data from Kenya's Treasury released last week shows that the country's debt rose to $41.91 billion to June 2017, from $34.33 billion at the end of June 2016,comprising 52.1 per cent in external debt and 47.9 per cent in domestic debt.

Treasury attributed the rise to increased external debt from exchange rate fluctuations, and disbursements from external loans debt.

"The net public debt increased by $7.24 billion, from $30.52 billion at the end of June last year to $37.77 billion at the end of June this year," Kenya's Treasury said in the review.

Its stock of domestic debt rose by $2.82 billion to $20.06 billion in June 2017 from $17.26 billion last year. Treasury bills made up most of the external debt at $9.49 billion.

The stock of Treasury bills held by the Central Bank, commercial banks, non-banking financial institutions and non-residents increased by $1.48 billion to $7.07 billion over the same period.

Budget presentation

The rise in Kenya's domestic debt goes against what Treasury Cabinet Secretary Henry Rotich said during last year's budget presentation.

During the reading, Mr Rotich said that the government would reduce the percentage of local debt as it realigned towards foreign markets for financing. He said government borrowing would be cut by $1.55 billion in 2016/17, but this was not achieved.

"We are more inclined to tap into the international markets than the domestic to finance the deficit. We are still favouring the international markets because of the concessional terms. We are very cautious on this, and will direct the funds received to development projects," Mr Rotich said at the time.

Kenya's external public debt stock increased by $354 million, from $1.78 billion in June 2016 to $2.13 billion by end of June 2017. Debt stock comprised of multilateral lenders at 38 per cent, bilateral lenders at 32.7 per cent, and commercial banks at 28.6 per cent.

Between March and June this year, Kenya's external public debt went up by $960.6 million, from $2.04 billion to $ 2.13 billion.

Early this month, two credit rating agencies, Moody's and Fitch, said they expect Kenya's debt to rise to 60 per cent of GDP by mid-next year.

High budget deficits

According to Moody's, Kenya's debt burden, which stood at 56.4 per cent of GDP in June this year, is expected to continue rising due to high budget deficits and interest payments.

With accumulating debt, Moody's is now considering lowering Kenya's credit rating.

"Unless a decisive policy response is introduced, the upward trajectory in government debt will see debt-to-GDP ratio surpass the 60 per cent mark by June 2018. Due to the erosion in government revenue intake in the past five years and increased recourse to debt from private sources on commercial terms, government debt affordability has deteriorated," said Moody's.

Kenya has taken up commercial debt, which has seen its interest payments rise to 19 per cent of its revenues, up from 10.7 per cent when President Uhuru Kenyatta's administration came to power.

Moody's also raised the red flag over the country's high loan repayments, which may lead to Kenya sourcing additional expensive debt. In the year to June, the total cumulative debt service payment to external creditors was $896.8 million, comprising $341.4 million as principal and $555.3 million as interest.

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