Kenya’s public debt burden is high but not excessive in a peer group context; with the external and domestic components each accounting for about 34% of GDP at end-2022, but the structure of external debt means servicing costs are relatively high.
External debt pressures climbed in 2022, as stringent US monetary tightening and the Russia-Ukraine war led to a spike in yields on Kenya’s six active Eurobonds, worth US$7.1bn in total.
The yield surge obliged Kenya to cancel a planned US$1bn Eurobond in mid-2022, leading to pressure on foreign-exchange reserves and more rapid exchange-rate depreciation, which is pushing up the cost of foreign debt servicing.
Kenya enjoys strong, ongoing support from the IMF and the World Bank but will face a potential crunch point in June 2024 when a ten-year Eurobond, worth US$2bn, will need repaying, unless a yield retreat allows for refinancing.
Provided Kenya successfully redeems the Eurobond in 2024, either via refinancing or by securing alternative loans, debt pressures will ease, as the next Eurobond redemptions, for a combined US$1.9bn, will not fall due until 2027‑28.
External borrowing grew briskly in 2013-20, as the government waded into the Eurobond market, drawn by competitive financing terms—with coupon rates in the 7‑8% range—and borrowed US$5bn on commercial terms from China, in three tranches, to finance a new standard-gauge railway (SGR).
Total external debt jumped from US$10.2bn in 2013 (16.5% of GDP) to US$34.8bn in 2020 (35.4% of GDP), according to the Central Bank of Kenya (CBK), including a tenfold jump in commercial borrowing (to US$10.4bn) and a near fourfold rise in bilateral loans (to US$10.6bn), led by China.
The World Bank estimates that Kenya’s external debt stock is about US$4bn larger than calculated by the CBK, although IMF figures align with Kenya’s official tally.
The reason for the discrepancy is not fully clear but is partly explained by the World Bank’s inclusion of private-sector borrowing. In either case, the sharp rise in external debt, especially from non-concessional sources, has been accompanied by a steep increase in servicing outlays.
A slowdown in debt accumulation
Debt dynamics shifted in 2020-22, as Kenya turned to concessional multilateral borrowing from the IMF, the World Bank and the African Development Bank, to help deal with the impact of the covid‑19 pandemic.
Kenya also embarked on a 38‑month IMF program in April 2021, running to mid-2024, supported by a US$2.34bn funding envelope, which is geared to towards strengthening fiscal and debt management.
The budget deficit declined from 7.8% of GDP in fiscal year 2020/21 (July-June) to 7.3% of GDP in 2021/22 and is projected to ease to 5.8% of GDP in 2022/23, reducing borrowing needs.
Debt owed to multilateral sources jumped from US$13.7bn in 2020, to US$17.9bn in 2022, whereas bilateral debt fell to US$9.8bn in 2022, and commercial debt dipped to US$10.1bn, despite a new US$1bn Eurobond in mid-2021 (paying a 6.3% coupon, the lowest rate to date).
The fall in bilateral debt reflects a drop in obligations to China, from a peak of US$7bn in 2021 to US$6.6bn at end-2022, as amortization outpaced new borrowing.
The overall debt stock moved upwards in 2021 and 2022, largely because of new multilateral borrowing, but remained stable at 34.5% of GDP.
Commercial debt would have risen higher if the mid-2022 Eurobond had gone ahead, but a spike in the average yield on existing bonds, from 6.7% in January 2022 to 14.7% in June, made a launch financially unviable.
Yields peaked at 15% on average in September before trending lower to 10.8% at end-February 2023, but the figure would need to fall back to about the 7% mark to allow for fresh Eurobond issuance.
Dwindling foreign-exchange reserves
One consequence of the cancelled 2022 Eurobond has been the steady erosion of Kenya’s foreign-exchange reserves, from US$8.9bn in January 2022 (5.3 months of import cover) to US$7.5bn in November (4.2 months of import cover), before a temporary uptick in December to US$8bn (3.9 months of import at end-2022).
The improvement in December stems from the disbursement of a fifth IMF programme tranche, worth US$447m, including an augmented sum of US$216m to help to relieve current financing constraints.
Foreign-exchange reserves resumed their retreat in 2023—partly because of a US$400m SGR loan repayment to China in January—to reach about US$7bn at end-February, cutting import cover to 3.9 months, a multi-year low.
In terms of usable reserves (rather than total reserves), current import cover is even lower, at about 3.6 months. Despite reserves remaining above the IMF’s recommended minimum of three months of import cover, a growing mismatch between the demand and the supply of US dollars is disrupting business and fuelling brisk shilling depreciation, which has accelerated in 2023.
The exchange rate slumped to US$125.4:US$1 on average in February, 10.4% weaker year on year, and has continued sliding in March, adding to inflationary pressures (in line with Kenya’s heavy import dependence) and to already-high debt-servicing costs.
From one perspective, the current mini-crunch in foreign reserves is a forewarning of what could happen in 2024, when debt repayments surge.
A range of remedial measures
To deal with current and future risks, the government will turn to other financing options in 2023 to bolster foreign-exchange reserves.
In a positive sign, World Bank budget support, which amounted to US$750m in April 2022, will provisionally rise to US$1bn in 2023, although the precise timing is uncertain and disbursement could be delayed until May or June.
A sharp rise in World Bank debt, from US$7.2bn at end-2019, to US$10.7bn at end-2022, means the agency is again Kenya’s single largest creditor by a large margin, having re-overtaken China in 2019.
Another World Bank policy loan in 2024 is not yet assured, but it would provide timely support in advance of the scheduled Eurobond redemption.
Kenya will also receive additional inflows under the IMF programme, in mid-2023, at end-2023 and in mid-2024, totaling about US$900m (excluding any further augmentations).
In addition, the IMF’s planned restructuring of country quotas later in 2023, to bring allocations more into line with economic size, will give Kenya a larger share, allowing for higher future borrowing.
The government is also working to secure syndicated loans from international banks in 2023, worth about US$600m‑900m in total—including three-year and five-year tranches—charging a 7‑8% interest rate, which will be less costly than Eurobonds in current market conditions.
To reduce near-term pressure on foreign-exchange reserves, the government is also moving closer to a deal with Saudi Arabia and the UAE to provide fuel imports on credit, with the bill to be settled after six months, although the strategy also entails risks, given the accumulation of payment obligations.
Turning towards domestic debt
Underpinned by Kenya’s relatively well-developed banking system and capital markets—especially in an East African context—domestic debt is a key part of government financing. In foreign-currency terms, domestic debt has remained roughly the same size as foreign debt since 2014, as both have increased at the same pace.
In line with the external debt trajectory, total public debt peaked in 2020 at 68% of GDP (according to CBK data), before edging slightly lower in 2021‑22, helped by narrower budget deficits. Under Kenya’s current fiscal plans, domestic borrowing will become more important in budget financing over the next three years, leading to a declining share of external debt.
The cost of domestic debt is heading higher, however, as Kenyan interest rates rise in response to higher inflation (of 9.2% year on year in February) and global monetary tightening.
To attract investors demanding higher returns, interest rates on domestic securities are climbing, as illustrated by an oversubscribed 17‑year infrastructure bond in March (with the label signifying its tax-free status), paying a 14.4% coupon, the highest currently on offer, which raised KSh51.9bn (US$400m).
Infrastructure bonds sometimes attract foreign buyers, as happened in September 2021, but the returns are not currently attractive, in view of heightened exchange-rate risks. The new bond’s tenor highlights the Treasury’s drive to lengthen the maturity profile of domestic debt.
The government’s commitment to fiscal consolidation, accompanied by strong financial support from multilateral agencies, is moving Kenya closer to achieving a sustainable budgetary and debt trajectory.
There will be bumps on the road, however, including current foreign-exchange shortages—which are impeding business operations—and the Eurobond repayment crunch in 2024. Other drawbacks of fiscal tightening for business are tougher tax rules and lower government spending on goods and services.
A retreat in Eurobond yields to about the 7% mark would allow the government to issue a replacement security, averting the risk of a crisis, but lower yields will first require an end to the current US monetary-tightening cycle, which is not imminent, leaving the timing highly uncertain.
In the absence of a new Eurobond, we believe Kenya has a good chance of meeting its redemption commitments in 2024, via careful planning and by tapping other borrowing sources, although foreign-exchange reserves would come under fresh pressure.
There is also a slim chance of a debt crisis in 2024, but provided Kenya jumps the hurdle, external debt pressures will ease, because of increased reliance on concessional borrowing, alongside a pause until the next Eurobond redemptions in 2027‑28.
The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service.
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