Deputy President William Ruto has said he plans to restore Kenya’s external creditworthiness, which has fallen and caused lenders to charge high interest on loans, adding on to the already huge public debt.
In his Kenya Kwanza manifesto launched yesterday, Dr Ruto also noted that the falling external creditworthiness could also scare away external creditors, turning the government to borrowing in the domestic market which is already expensive and would crowd out the private sector.
The manifesto noted that rising interest rates for Eurobonds, to which the government had turned a few years ago for being cheaper than domestic rates, risked adding more burden on the public debt and impacting further on interest rates in the domestic market.
“The rise in interest rates is causing difficulties in refinancing our foreign commercial debt. Rising interest rates portend refinancing risk that is, investors not having appetite to roll over our bonds when they mature, or only willing to do so at inordinately high interest rates, in which case the government may have to finance the redemption of the maturing debt from foreign exchange reserves,” the manifesto stated.
This follows a recent case where a bond the National Treasury had floated attracted a 12 per cent interest rate, with Treasury resorting to other alternatives to fill the financing gap.
“Rising global interest rates will not only increase the cost of borrowing abroad, but may also be transmitted to domestic interest rates, increasing the overall debt service burden on the government, making budget deficit reduction that much more challenging and aggravating the problem of crowding out of the private sector from the domestic credit market,” the Kenya Kwanza manifesto stated.
While noting that already, interest paid on debts owed to domestic creditors is expected to take up Sh660 billion of the expected slightly more than Sh1 trillion repayment, Kenya Kwanza stated “Interest cost is now the single largest expenditure item on the recurrent budget, exceeding the National Government wage bill (Sh550 billion) and dwarfing the county governments’ equitable revenue share (Sh370 billion).”
The manifesto stated that where Kenya is, restoring the country’s external creditworthiness was important.
“It is important to note that although foreign and domestic debt are of the same order of magnitude, domestic debt accounts for close to 80 per cent of the interest cost at Sh515b, against Sh144b interest on foreign debt. This underlines the importance of restoring the country’s external creditworthiness,” it stated.