Kenya's move to leverage the commercial debt market in February and the country's early withdrawal from the IMF program in March sparked new debate about how the country is working on debt.
Kenya raised an 11-year, $150 million eurobond to fund the early retirement of the $900 million memo in 2027. A total of $593.3 million from the proceeds from the issuance were used to partially repurchased the $900 million memo, but the balance was acquired to pay back the commercial debt scheduled for March.
When it was announced in March that Kenya would be closing its $3.6 billion IMF program before the final review phase, more questions were raised about the country's debt profile. The report suggests that the fund is not impressed with the progress Kenya has made to curb spending and improve tax revenue.
Together, the move appears to be a further indication that Kenya is moving towards commercial funding sources. Last February, Kenya also partially retired from the mature $2 billion memo, selling $1.5 billion in eurobond. The next important sovereign maturity is bonds with a 2028 deadline of $1 billion. It is estimated that Kenya will need around $26 billion over the next decade to resolve its mature foreign debt and $1.5 billion annually to pay external interest.
According to a budget policy statement issued by the Ministry of Finance in March, Kenya's foreign debt in January was $39.4 billion, while domestic debt was Sh5.93 tn ($45.8 billion). Multilateral lenders such as the IMF and the World Bank accounted for 55.6% of foreign bonds, while bilateral lenders led by China accounted for 21.4% of foreign bonds. Commercial loans, which mostly contain Eurobonds, outperform bilateral loans, with 23% external debt.
Accommodation Market
The good news is that commercial investors are somewhat adjustable, reflecting the returns they requested in the latest Eurobond issue, claims Churchill Ogutu, economist at Asset Manager IC Group.
“Compared to Eurobond 2031, which was issued last year at a 9.75% coupon rate, Eurobond 2036 has a slightly longer tenor coupon rate of 9.5%, meaning a very favorable risk sentiment compared to a year ago,” he told African business.
He argued that the central bank's recent monetary policy easing and Kenyan Shilling's stability over the past year have sparked bullishness among commercial lenders.
Investor trust also received an increase in January following a move by the global rating agency Moody to upgrade the country's outlook from “negative” to “positive”, citing the potential ease of liquidity risk and the potential ease of improving debt affordability.
Concerns at IMF Program exits
Eurobonds and other commercial loans have proven to be a good way to refinance Kenya's growing debt, but some experts warn that overreliance on them is strained in relations with concessional lenders such as the IMF and the World Bank.
Kenya's $3.6 billion funding program with the IMF, signed in 2021, was scheduled to expire in April. Following an IMF review in March, it was confirmed that Kenya will not proceed with a final review of the facility. Instead, they are looking for a successor program.
“The Kenyan authorities and IMF staff have reached an understanding that the ninth review based on the current Extended Fund Facilities and the expanded credit facility program cannot continue. The IMF has received a formal request for the new program from the Kenyan authorities and will issue a statement following the upcoming staff visit in March.
Given that Kenya has not met some of the key benchmarks for the IMF outgoing program, there is a disagreement as to whether Kenya can secure a successor program. For example, authorities are struggling to increase tax revenue, sell struggling state-owned companies, and curb borrowing from expensive commercial sources. The fiscal deficit has also grown, reaching 5.02% of GDP, according to the latest forecast from the Ministry of Finance. There has been an agreement with the IMF, which means that this figure will not exceed 4.3% this year.
Dependence on commercial loans has been raised question
Samuel Oniuma, an associate professor of investment and capital market development at Laikipia University in Kenya, says it is important for Kenya to secure concession financing rather than relying solely on commercial loans.
“Commercial debt has high costs and short maturities, which can exacerbate Kenya's debt vulnerability,” he says.
Onyuma has told African businesses that excessive reliance on commercial credit sources could boost borrowing costs in Kenya and derail some advances in reforms committed by the authorities in the existing lending programmes with the IMF and the World Bank. This could put access to cheap concession loans from these Washington-based agencies at risk.
“We shouldn't lose the opportunity to have cheap loans with long term maturities by getting a full throttle on these commercial loans. We need a balance,” he said.
Onyuma argues that access to concessional funds not only reduces overall borrowing costs, but also provides an opportunity to embrace economic policies that promote long-term stability, not only free up resources for development and social programs.
“These programs include several policy reforms aimed at strengthening economic stability, improving fiscal management and promoting sustainable growth. They can provide a framework for building sound economic policies and investor trust,” he said.
He admitted that, although it is beneficial in the long term, it is “political sensitive and difficult to implement,” some of the reforms backed by the IMF, have been recognized.
This was clear last year when President William Root's administration shelved plans to raise taxes after fierce public opposition that culminated in deadly protests in June and July.
Tax increase key
Onyuma argues that efforts to promote tax collection should not be abandoned, regardless of how new IMF support is negotiated to ensure negotiations. “Financial integration should be prioritized. It's serious. It requires strong revenue mobilization,” he says.
He argues that by repaying debt and generating additional tax revenue to support public spending, it provides Kenya the clearest path to debt sustainability and economic stability. He stressed that the reverse approach – refinancing mature debt – would only provide short-term relief, while immersing the country in further debt.
Onyuma says that bringing Kenya's informal sector into the tax net could significantly improve revenue performance. “We cannot marshall income from this sector. We don't have a system in place to collect taxes or the tax system is somewhat complicated. Simplifying tax procedures is important because people in the informal sector often lack the ability to follow.”
He said that the Kenya Revenue Agency (KRA) is a step in the right direction, moving to embrace digital systems and strengthening compliance in the informal sector. He called for more digital transformation in tax management with the warning that digital tools should not be used as “not as punitive measures and as a way to facilitate tax payments.”
