Why Kenya backs UN debt service relief call

debt relief

A UN call to give poor countries space before paying mountains of debt owed to lenders gets more voice.
 

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Kenya has welcomed a renewed push by African ministers of Finance backed by the UN Economic Commission for Africa (UNECA) for rich countries to extend debt service relief for regional countries in order to help their economies recover from the Covid-19 pandemic and weather impacts of the Ukraine war.

Kenya says such a move is timely and if heeded, would provide a "breathing space" to help African nations cushion regional economies from the fallout caused by the latest Russia and Ukraine war.

There are fears that debt servicing obligations could crowd out other critical expenditure by African governments in response to the economic fallout from the latest crisis, according to analysts.

Resolutions by African ministers after the 54th Session of the Conference of African Ministers of Finance, Planning and Economic Development (CoM 2022) renewed calls for improved liquidity and better fiscal space for African countries as they recover from multiple global crises.

The draft resolutions approved by the Committee of Experts and seen by Smart Business warn that in spite of the best national and global efforts, effects of Covid-19, the war between Russia and Ukraine and worsening climate conditions “are widening the development financing gap in Africa and augmenting the continent’s debt vulnerabilities”.

“The working group advocates to extend the debt service suspension initiative by another two years and to waive the IMF surcharges for two to three years. In terms of emergency financing too, the IMF needs to raise the access limits for countries to secure funding,” said UNECA deputy executive secretary and chief economist, Hanan Morsy in a statement.

The Treasury, which is responsible for managing the country's purse did not respond to our queries on the new common call by the UN agency and the African Finance ministers by press time.

The call has, however, been backed by the Kenyan ministry of Foreign Affairs, which echoed mounting concerns that sub-Saharan African nations find themselves facing another severe and exogenous shock with little financial room to wiggle amid debt servicing obligations.

“We would be more than happy to partake of course,” Foreign Affairs Principal Secretary Macharia Kamau told Smart Business. “Kenyans too are under strain from global trends.”

Ongoing Russia-Ukraine war has prompted a surge in food and fuel prices in Kenya and other African countries that threatens the region’s economic outlook.

Analysts say this latest setback could not have come at a worse time—as economies were starting to recover and policymakers were beginning to address the social and economic aftermath of the Covid-19 pandemic and other development challenges.

According to the International Monetary Fund (IMF), effects of the war will be "deeply consequential, eroding standards of living and aggravating macroeconomic imbalances."

Echoing the concerns, the UN Under-Secretary-General and Executive Secretary of the ECA, Vera Songwe, says they will work with African governments and institutions to explore "the innovative finance options for Africa’s recovery that came up during the session."

Ms Songwe added in a statement that G20 nations should take fresh measures to unlock billions of dollars for Africa’s poorest and also developing countries such as Kenya to help avoid lasting scars from a prolonged funding gap caused by the Covid-19 pandemic and the emerging shocks from the Ukraine.

Kenya was initially reluctant to apply for debt suspension offers by rich countries but had a change of heart in January last year after domestic revenue collection missed target by 12.4 percent, or Sh115.9 billion, in the half-year period to December 2020 — hurt by the economic fallout of Covid-19.

The pandemic hit Kenya’s revenues and limited access to commercial loan markets, forcing the country to turn to the World Bank and the IMF for direct budgetary financing.

The country earlier projected savings of up to Sh78.17 billion after it signed debt repayment moratoriums with several rich countries, lifting pressure on its thinned domestic revenue collection.

The National Treasury estimated last year that deferred repayments for loan principals would amount to Sh42.23 billion in the previous financial year ending June 2021 while reliefs on interest payments would hit Sh35.94 billion.

China, Kenya’s largest bilateral lender, accounted for 39 percent of the deferred debt which, Nairobi secured in January last year.  Chinese loans have financed the construction of rail lines, roads and other infrastructure projects in Kenya in the past decade.

The deal between Nairobi and Beijing saw Exim Bank of China suspend payment of Sh30.48 billion or 41.67 percent of the estimated Sh73.15 billion it was due to get this financial year ending June last year.

That was preceded by another deal with the Paris Club which cumulatively deferred about Sh32.9 billion in January 11 last year under the G20-led Debt Service Suspension Initiative (DSSI) framework.

Countries, which earlier accepted debt reliefs for Kenya under the DSSI framework, included France, Italy, Japan, Spain, the US, Belgium, Canada, Denmark, Germany and Republic of Korea.

Rich countries two years ago backed an extension of the G20’s Debt Service Suspension Initiative (DSSI), to help developing nations survive the coronavirus pandemic, which saw 43 of a potential 73 eligible countries defer $5 billion in “official sector” debt payments.

The call by the UN agency and the African ministers came even as the African Development Bank (AfDB) warned last week, that Africa risks sliding into stagflation - a cycle of slow growth and high inflation - as it battles the lingering effects of the pandemic and rising fuel and food prices caused by the Ukraine conflict.

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