Broke Kenya eyes talks on foreign debt cancellation

Treasury Cabinet Secretary Ukur Yatani.

The Treasury will try to push wealthy countries and multilateral lenders like the World Bank to cancel part of Kenya’s ballooning public debt, reflecting concerns about the burden of paying creditors from taxes that have been hit hard during the coronavirus pandemic. In a November paper titled Post Covid-19 Economic Recovery Strategy 2020-2022, the Treasury says that it’s considering initiating talks with donor countries and multilateral lenders for debt forgiveness.

This marks a bold admission that the country is struggling to repay the mounting public debt signals the gravity of the country’s rapidly deteriorating cash-flow situation that is marked by falling revenues and worsening debt service obligations. Debt repayment in the four months to October accounted for 58 percent or Sh246.2 billion of the Sh426.3 billion taxes, which dropped 14 percent in the period on reduced economic activity.

The Treasury, which last week changed its mind about joining a G20 debt relief initiative, is now seeking to have part of the country’s Sh3.6 trillion foreign debt cancelled. This will help Kenya cut billions in monthly interest payments to foreign donors and offer it additional room for more borrowing as it races to breach the Sh9 trillion debt ceiling.

“The other key measures of the post-covid-19 ERS (economic recovery strategy) resource mobilisation strategy are…engaging creditor nations and multi-lateral institutions to secure debt servicing moratorium and debt cancellation to free up resources and provide the requisite budgetary flexibility,” the Treasury says.

Debt cancellation is where part of a country’s debt is written off by rich nations and multilateral donors or where commercial bank loans are bought by the World Bank’s Debt Reduction Facility, clearing principal, interests, arrears and penalties, according to the World Bank.

The IMF and the World Bank initiated debt forgiveness in the 1990s to help fight poverty and avoid defaults that would lead to a country being cut off from international credit lines by fretful creditors. The debt forgiveness under Highly Indebted Poor Countries (HIPC) has since 1996 cancelled debts worth $76.2 billion (Sh8.3 trillion). The Multilateral Debt Relief Initiative (MDRI), a full debt relief from the World Bank’s International Development Association (IDA), the IMF, the African Development Fund and the Inter-American Development Bank, has waived loans worth $43.3 billion (Sh4.7 trillion) offered to poor countries.

Somalia was the latest beneficiary in March after it got a debt waiver worth $4.65 billion (Sh509 billion) under the HIPC programme. Kenya will make another attempt at securing debt forgiveness from wealthy nations and multilateral lenders after the donors rebuffed a similar move in the 1990s. The corrupt Moi regime applied to have part of Kenya’s debt written off under the HIPC arrangement but was turned down alongside Angola and Vietnam because the foreign loans were deemed sustainable.

Kenya’s public debt stood at Sh629 million or 60 percent of the gross domestic product (GDP) when the late President Daniel arap Moi left office in December 2002. There has been a rise in government borrowing in recent years, which gained momentum when President Uhuru Kenyatta came to power in 2013. Kenya’s public debt as a percentage of GDP has increased to 69 percent from 42 percent when Mr Kenyatta took over.

The government has defended the increased borrowing, saying the country must invest in infrastructure, including roads and railways. ”The piling public debt has seen Kenya commit more than half of taxes to paying loans, leaving little cash for building roads, affordable housing and revamping of the ailing health sector.

But faced with revenue shortfalls amid the coronavirus-related disruptions and the push to complete projects ahead of Mr Kenyatta’s exit, the Treasury is expected to accelerate borrowing over the next two years. Kenya is now planning to defer around $690 million (Sh75 billion) in debt payments as it seeks further funding from the IMF and the World Bank for budget support to weather the coronavirus economic hardships.

The Group of 20 major economies had in April agreed to suspend payment obligations on bilateral debt owed by their less developed counterparts through the end of the year.

Source: Business Daily Africa