Kenya Faces Debt Repayment Difficulties As Foreign Exchange Reserves Fall

Kenyans are staring at difficult economic times ahead as government moves to ramp up revenue collection to pay off part of Eurobonds and SGR debt that are due in March.

The government is facing foreign debt repayment estimated at Sh63 billion ($506.7 million) in the next month. In the event of a failure in the payment terms, Kenya risks a further escalation in debt that may occur due to a breach of the agreement.

However, experts believe that this may only be the beginning, despite the Kenya Kwanza government walking a fine line in its attempts to offset the maturing debt.

The nation is already having trouble maintaining its foreign exchange reserves, which are now only enough to fund imports for 3.92 months instead of the 4 months required by law.

Kenya’s reserves have been decreasing recently, in part due to payments made to commercial and bilateral lenders. These are the financial resources that nations utilize to carry out their commitments under international financial agreements, including paying off foreign debt, influencing monetary policy, and facilitating imports.

Kenya currently faces a significant danger of debt distress, according to the World Bank and the International Monetary Fund. The country’s debt-to-GDP ratio is currently at 62.3 percent, 12.3 percent more than the suggested IMF threshold of 50.0 percent for developing nations.

Earlier this year, rating agency Fitch warned that the nation’s significant current account deficits and rising external debt service requirements in 2023 and 2024, notably the maturity of a $2 billion Eurobond in June 2024, would put prolonged pressure on foreign reserves.

Due to Kenya’s ongoing twin fiscal and external deficits, Fitch reduced the country’s credit rating from “B+” to “B.”

Additionally, as of October 2022, Kenya’s debt was Sh8.7 trillion, which is Sh1.3 trillion less than the debt ceiling of Sh10 trillion. As a result, the overall debt is on the verge of exceeding the debt cap, and the planned borrowing for the fiscal years 2023–2024 is Sh695.2 billion. The government will have to think about setting a new debt ceiling because the present one is probably going to go above Sh10.0 trillion soon.

With the debt service to revenue ratio at 51.0 percent as of December 2022, the government will therefore be under intense pressure to make payments on the existing debt. The likelihood of economic growth is decreased by high levels of debt since a substantial amount of income is diverted from development spending to pay down existing debt.

Some of these suggestions include: lowering the corporate income tax gap from 32.2 percent to 30%; lowering the value-added tax (VAT) gap from 38.9 percent to 19.8 percent; and integrating KRA Tax Systems with telecommunications firms. The research does, however, issue a warning that a tax increase at a time when the economic climate is still gloomy will have a negative impact on predicted revenue growth.