State House in Nairobi
By Business Daily Africa
The winner of Kenya’s presidential election will have an in-tray full of economic and political challenges to solve when he assumes office. The polls happened in the middle of an economic crisis, with the country struggling with inflation that was at a five-year high of 8.3 percent in July on the back of costly food and fuel.
The price rises, partly fuelled by the war in Ukraine, have deepened economic problems triggered by the coronavirus pandemic, including stagnant wages and growing youth unemployment. Opposition leader Raila Odinga and Deputy President William Ruto, neck-and-neck in the opinion polls, have each promised a solution to the cost of living problem.
The country is also grappling with soaring public debt, uncertainties over maize flour and fuel subsidies that have attracted criticism from some economists, and a shilling hit with 14 straight months of depreciation against the dollar. The election winner also has to juggle the thorny issues of affordable education and risks of drought while keeping the economy on track.
Incoming president needs Sh3.89 billion daily to pay off Kenya ballooning debt
President Uhuru Kenyatta required an average of Sh630 million daily in 2013 to settle pubic debts inherited from his predecessor, Mwai Kibaki. But his successor will require nearly six times more or Sh3.89 billion daily to pay off Kenya’s ballooning debt, thanks to a borrowing binge driven by funding needs of infrastructure projects such as railways that have saddled the country with steep repayment obligations.
The government is spending more than half of taxes or Sh1.39 trillion in the year starting July on repaying debt and the interest it has accrued. This has squeezed Kenya’s finances and denied the Treasury the funds it requires to revamp the economy and create jobs, creating a headache for Deputy President William Ruto and opposition leader Raila Odinga – the two contenders to succeed Mr Kenyatta.
Mr Odinga said he planned to renegotiate loans with a number of creditors, including China, if he won. Some loans could be converted so they had longer repayment terms and lower interest rates to free up money for new development projects, he suggested.
Dr Ruto, on the other hand, has made it clear that he is “not considering negotiating any debt”, referring to existing loans, and that he will instead broaden the tax base and cut expenditure on infrastructure projects.
Analysts reckon that both options will be hard to execute and are fraught with risks.
“The best chance is to have restructuring with the bilateral creditors, but at best I think it may require renegotiating the financing terms (maturity and interest costs) to alleviate debt service costs,” said Churchill Ogutu, an economist at IC Asset Managers with a focus on East Africa.
“Multilateral lenders issue loans at concessional terms and there’s no meaningful impact in restructuring that stock of debt while Eurobonds may be difficult as it entails having discussions with heterogeneous lot of investors which is a Herculean task.”
Analysts at New York-headquartered investment banker, JPMorgan, said renegotiating terms of debt will free up more cash if the review focuses on domestic portfolio– which accounts for 72.8 percent of the annual debt repayment costs or Sh1.04 trillion. → Constant Munda.
Tough conversations with Beijing on debt, SGR contract Kenya’s next president is set for a difficult conversation with China, if the pronouncements by leading contenders Raila Odinga and William Ruto during their campaigns are anything to go by. Both candidates dwelt on China’s economic relationship with Kenya, which has been characterised by concerns over heavy borrowing for infrastructure projects and a trade imbalance that is heavily in favour of the Asian economy.
Deputy President Ruto, speaking in June, took issue with the large number of Chinese arrivals in Kenya in recent years, particularly those engaging in informal and retail businesses that he deemed should be left to locals.
Dr Ruto hinted at the possibility of deportations, which reportedly did not go down well with the Chinese government.
In a subsequent interview, he also promised to disclose the details of the closely guarded Sh477 billion standard gauge railway (SGR) contract, as well as that of the just commissioned Nairobi Expressway which has been built under a public-private partnership (PPP) plan at a cost of Sh88 billion.
The two China-funded projects are the signature infrastructure projects of President Uhuru Kenyatta, with whom Dr Ruto has fallen out politically. Mr Odinga has promised to renegotiate the country’s external obligations, which include a significant Chinese portion.
By the end of May, Kenya owed China Sh796.5 billion, accounting for 18.5 percent of Kenya’s external debt load of Sh4.29 trillion, and 9.3 percent of total public debt which stood at Sh8.56 billion as at May 31.
The two candidates’ China plans are likely to elicit very different conversations with Beijing. Disclosing contract details that the Asian country has seemingly been keen to keep confidential, as suggested by Dr Ruto, while also instituting immigration curbs would ruffle diplomatic feathers, could attract retaliatory measures.
Mr Odinga’s hopes of softened debt terms are also likely to face headwinds, given Beijing’s reluctance in the past to retool debt repayment plans for countries such as Kenya.
The Import-Export Bank of China, a major financier of the SGR, notably resisted the attempts by Kenya to get a debt payment freeze during the Covid19 period.
Weak shilling poses debt service and balance of payment problems for the next Treasury boss The Kenya shilling has this year depreciated by five percent against the US dollar to an all-time low of 119.12 units, eclipsing the 3.5 percent it shed against the greenback in the whole of 2021.
For the incoming administration, the weaker currency will have significant economic implications, especially on external debt service and fulfilling the promises of lowering the cost of living in the country.
In the 12 months to March 2022, the value of imports into the country rose by 30 percent to a record Sh2.23 trillion, outpacing export earnings which rose 16 percent to Sh756.4 billion. The country’s trade deficit therefore jumped to Sh1.47 trillion from Sh1 trillion a year earlier.
This has piled pressure on the shilling as demand for dollars has gone up significantly, leaving importers complaining of difficulties accessing hard currency to finance external obligations.
The incoming Treasury team is thus expected to face the same balance of payment problems that have forced the country into funding arrangements with the International Monetary Fund (IMF) and the World Bank.
“A widening current account deficit (5.3 percent of GDP in May 2022) linked to a rising import bill should continue to curtail the shilling’s fortunes. Moreover, central bank support may be limited by dwindling forex reserve position,” economists at NCBA say in an economic report for August 2022.
“We expect the official rate to adjust further to a low of 122 (average) in September and stabilise around this level by year end.”
Central Bank of Kenya (CBK) intervention in the market has been limited to ironing out volatility, and even in this endeavour the regulator has rarely resorted to dollar sales, preferring instead to rely on managing local currency liquidity.
This is partly driven by the finite nature of official reserves, which have not been replenished as regularly as in previous years due to the government’s struggles to raise international commercial loans on cost concerns.
The incoming administration will be looking at Eurobonds and syndicated loans in the interest range of 12- 16 percent, going by prevailing yields on the secondary market for existing issuances.
The difficulty in raising external loan dollars outside of the concessional IMF and World Bank lending, coupled with heightened demand for dollars locally, means that the exchange rate will continue to be a headache for whoever takes over at the Treasury.
Suppliers threaten class action over delayed payments
Kenya’s new leader will be scratching his head over pending bills which have crossed Sh500 billion, hurting the survival of small-sized ventures and job opportunities. Arrears to government suppliers and contractors have continued to mount amid tough rules requiring payments be made within 60 days of goods or services being supplied.
Latest Treasury statistics show pending bills at national government level, largely by parastatals including public universities, jumped to Sh434.5 billion in March 2022 from 307.8 billion a year earlier. Many Kenyan small and medium-sized businesses bid for government contracts because the State is the biggest spender in the country.
The non-payment has led top asset seizures by banks, triggering business closures and joblessness. A large number business people who have contracts with the government have ended up blacklisted by credit reference bureaux after falling behind on loan repayments or defaulting.
Association of Public Sector General Suppliers (APSGS) secretary-general Simon Gichuki says the lobby, which claims 3,400 of its 4,100 members are owed cash dating as far back as 2014, has received documents on pending bills amounting to Sh38.4 billion ahead of September 1 when a class-action lawsuit is expected to be filed.
“The biggest worry is that most of the new governments are afraid of paying the old bills when they come into office. This is because of obvious fears like there might have been corruption and this creates a problem for them or if they pay, they may not have money for their own projects,” Mr Gichuki said. → Constant Munda