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Treasury must go slow on costly commercial loans

by Staff
June 10, 2022
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Editorials

Treasury must go slow on costly commercial loans

Friday June 10 2022

loan

The Treasury’s decision to cancel the issuance of a Sh115 billion ($1 billion) Eurobond is welcome.

The move will help ease the growing burden of paying Kenya’s mounting public debt.

Eurobonds had become expensive in the wake of Russia’s invasion of Ukraine and interest rate hikes in the US and Europe as western nations fight stubbornly high inflation.

It would have been irresponsible for the Treasury to tap the Eurobond at 12 percent given Kenya had accessed similar facilities at six percent.

For nearly four years now, Kenya has gone easy on costly commercial debt to cut back on ballooning repayments, which will consume 65 percent of taxes, impeding spending on development projects in a country mired in poverty. We must continue on this trajectory in quest for a sustainable debt policy.

Kenya has now opted to borrow from a syndicate of banks to plug its budget deficit for the year starting July.

We urge the Treasury to pursue this route if the interest rates offered by the bankers are at single digit.

Syndicated bank loans are equally expensive and tend to be short-dated, characteristics of debt that risks putting pressure on Kenya’s loan repayments.

Our position is that the Treasury should aggressively pursue the policy of refinancing or substituting commercial loans with cheaper options from friendly nations or development financiers.

Kenya must go slow in raising more debt from overseas capital markets, after a borrowing binge in recent years including Eurobond offerings, a package of Chinese loans and syndicated commercial loans.

This is where the World Bank and International Monetary Fund come into play.

Their loans may force the government to implement tough conditions across many sectors, but they come with friendly repayments terms — which Kenya gravely needs.

Typically, World Bank concessional loans have zero or very low interest rates and have repayments periods of 25 to 40 years, with a five- or 10-year grace period.

There has been a rise in government borrowing since President Uhuru Kenyatta came to power in 2013 — a jump that some politicians and economists say is saddling future generations with too much debt.

Kenya’s public debt as a percentage of gross domestic product is nearly 70 percent from 42 percent when President Kenyatta took over.

Therefore, the Treasury must be cautious in its borrowing and taping costly debt.

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