Controller of Budget Margaret Nyakang’o. FILE PHOTO | FRANCIS NDERITU | NMG


Puzzle of Kenya’s expensive IMF, World Bank loans

Controller of Budget Margaret Nyakang’o has flagged the cost of concessional loans taken up by the government over the years from lenders such as the International Monetary Fund (IMF) and the World Bank, saying they might be expensive in the long run.

Dr Nyakang’o, in a presentation to the National Assembly Committee on Public Debt and Privatisation on the medium-term debt management strategy, said that in some cases the interest is disguised as other charges, which raise the effective cost of a loan.

“They baptise their interest…the bulk of which they call service charge, which nobody has ever fathomed,” said Dr Nyakang’o.

While Dr Nyakang’o did not provide data to back her claims during the parliamentary presentation, she told the Nation that the cost of the loans average 14.5 percent.

“Our analysis has revealed that the average interest paid on concessional loans has averaged 14.5 percent for many years, which is not cheap by any standards,” she said.

At 14.5 percent, such loans would be significantly more expensive than the commercial loans the country has contracted over the past decade from the sovereign bond market.

Dr Nyakang’o’s remarks have elicited a sharp reaction, with the Director-General Public Debt Management Office National Treasury Haron Sirima dismissing them as false.

Kenya has increasingly relied on funding from the IMF and the World Bank for budgetary support.

These loans, where interest rates are disclosed, are usually charged less than 3.0 percent, and also carry long repayment periods and a grace period before the start of payments.

But Dr Nyakang’o said on Thursday that “most of the so-called concessional loans might possibly be very expensive in the long run and with a low impact in terms of economic development”.

The loans come with serious austerity conditions such as increases in taxation, she said.

“My office recommends an audit of these loans and the projects they support to ascertain the effectiveness of these loans,” said Dr Nyakang’o.

While dismissing the Controller of Budget’s claims, Dr Sirima told the Nation that rates on concessional loans are computed using OECD (Organization for Economic Cooperation and Development) standards

“Concessional loans or finance is below market rate finance provided by major financial institutions, such as multilateral agencies like the World Bank, IMF, EIB, and ADB to developing countries to accelerate development objectives. Bilateral development agencies also extend concessional finance. OECD guidelines are used to determine the level of concessionality and forms the standardized basis for debt classification,” he said.

A loan with a grant element of at least 25 percent calculated at a discount of 10 percent, he said, is classified as concessional under the OECD Guidelines available on their website.

“I am not aware of concerns raised by CoB on the computation or classification loans on the basis of concessionality using OECD methodology which is the international standard metric used globally by debt management offices, multilateral and bilateral agencies,” Dr Sirima said, adding that the Office of the Auditor-General carries out audit of all loans in the debt register on annual basis.

“A loan that carries an interest rate of 14.5 percent per annum (say Treasury bond or foreign currency-denominated commercial loan) cannot be a concessional loan as such rate is not below market interest rate!”

The costliest Eurobond floated by the country so far is the $1.5 billion offer sold earlier this month at a coupon of 9.75 percent.

The country’s debut $2.85 billion Eurobond in 2014 came in two tranches of five and 10-years, which paid interest at 5.875 percent and 6.875 percent respectively. Subsequent issuances in 2018, 2019 and 2021 carry coupons of between 6.3 percent and 8.25 percent.

Latest provisional public debt data published by the Central Bank of Kenya (CBK) shows that the country’s stock of external debt stood at Sh6.09 trillion or $38.92 billion by the end of December 2023, while domestic public debt stood at Sh5.05 trillion.

In the 2024 medium term debt management strategy report that is currently awaiting approval by Parliament, the World Bank is identified as Kenya’s largest multilateral lender, mainly through its concessional lending arms known as the International Development Association (IDA) and International Bank for Reconstruction and Development (IBRD).

By the end of June 2023, the debt strategy report states, Kenya held Sh1.73 trillion worth of outstanding credit from the two World Bank agencies.

The African Development Fund (ADF) and the African Development Bank (AfDB) had lent the country outstanding credit facilities worth Sh517.9 billion, while other multilateral lenders’ credit stood at Sh411.3 billion.

Outstanding loans from bilateral lenders, including China, stood at Sh1.26 trillion by the end of June 2023, while commercial loans from banks and sovereign bonds totalled Sh1.35 trillion.

Over the past four years, Kenya has sought to raise the bulk of its external loans from concessional lenders, due to concerns about the cost of servicing its external debt which is done using dollars from the CBK’s official reserves.

A weaker shilling against the dollar has also raised the cost of servicing external debt, putting pressure on the Treasury to identify cheaper sources for such loans.

Fiscal constraints have also forced Kenya to rely on a funding programme by the IMF since 2020, when the Covid-19 pandemic put the country’s ability to service external obligations in jeopardy.

The total amount under the programme, which runs until April 2025, is $4.3 billion (Sh624 billion), out of which the country has so far drawn down $2.6 billion (Sh377 billion), the most recent being a $684.7 million (Sh99.3 billion) tranche taken up last month.