Sh1.6trn debt repayment pain in Ruto’s first term

President William Ruto faces a heavy external public debt burden during his first term, with his government expected to spend nearly Sh1.6 trillion servicing the debts.

Projections from the National Treasury show that over the five years – July 2022 to June 2027 – the government will spend a total of Sh1.59 trillion servicing loans borrowed from external creditors, which hit Sh4.36 trillion in October 2022.

Treasury’s 2021/22 annual public debt management report projects that the government will spend Sh241 billion servicing external debts in 2022/23, up from Sh184.5 billion that was used to pay the bilateral, multilateral and commercial lenders in 2021/22.

Between the two financial years, the external public debt servicing costs increased by 43.9 per cent.

“The projections of external debt maturities show that a total of Sh241,060 million, Sh475,596 million, Sh281,459 million, Sh289,467 million and Sh311,340 million will be due in the FY 2022/23, FY 2023/24, FY 2024/25, FY 2025/26 and FY 2026/27, respectively,” the Treasury report showed. It explained that the near-double debt servicing figure in 2023/24 is due to a Eurobond expected to mature in 2024.

“Overall, repayment of external debt is expected to increase in the medium term,” Treasury stated.

Last year, Treasury sought to convince external lenders to restructure some of the loans maturing in the coming years to ease the burden, but the efforts failed after the government was hit with high interest rates.

This left President Ruto’s administration, which started in September 2022, with the burden. The administration cried foul after taking over a government with little fiscal space.

“The National Treasury planned to undertake liability management operations in the FY 2021/22 with the aim of lengthening the maturity structure and reducing the refinancing risks in the debt portfolio. The operations targeted to employ a market-based debt re-profiling approach to repay the Eurobond maturing in FY 2023/24.

“These liability management operations were not implemented as the international market conditions were unfavourable due to the elevated yields as a result of the global monetary policy to increase rates to avert inflation rates as well as the Ukraine and Russia crisis,” Treasury stated in the report.

When the government sought an extension of the repayment time frames, it found interest rates of up to 12 per cent, from a low of 6 to 8 per cent it had borrowed in the past.

“The National Treasury initiated engagements with the holders of targeted commercial debt earmarked for re-profiling and proposed amendments to the facility agreements. The proposed review of terms included repeal of the punitive prepayment clauses that require prepayment fees that could arise as a result of voluntary pre-payment of any amount outstanding.

“Owing to heightened yields on emerging sovereign debts that persisted during the year, the re-profiling initiative did not materialise and the National Treasury deferred implementation of the initiative indefinitely,” Treasury stated.

This left the new government with a Sh1.59 trillion debt, even as it tries to balance the mandatory commitment with ambitious promises it made prior to the General Election.

Kenya’s total public debt hit Sh8.745 trillion in October 2022, and domestic debt servicing costs have historically been higher than the external debt costs, meaning the burden ahead for the new government remains huge.

Much of the external debt is also denominated in US dollars (69.3 per cent), which adds pain to the taxpayer due to the worrying speed at which the Kenyan shilling has been depreciating against the dollar. When the Kenyan currency depreciates, the amount needed to service debts using the dollar goes up.