Debt pain as interest payments now eat up 30pc of revenues

For every 100 shillings in tax collected, the government is channelling 30 shillings towards interest repayments on debt as Kenya’s debt pressure tightens.

According to a new analysis by Genghis Capital, the higher interest payments leave Kenya’s debt sustainability a precarious position even as the National Treasury maintains its stance on Kenya’s debt sustainability.

“Interest being a first charge on government spending makes the repayments a critical part of public debt management as it impacts on both recurrent and development expenditure partly funded by ordinary revenue,” stated Genghis Capital Head of Research Churchill Ogutu.

The National Treasury has continued to run up to higher debt costs in recent years packing the pressure on the availability of funds for alternative spending.

Interest costs as a percentage of revenues hit 30.4 per cent of ordinary revenues between July and October last year rising from a lower 28.9 per cent in the financial year ending in June 2020.

The higher ratio is however on the back of shrunken government revenues from reduced business activity following the advent of the COVID-19 pandemic.

While the Kenya Revenue Authority has hinted at a turn around in collections following the gradual reopening of the economy, Ogutu says the government is likely to still miss its revenue targets drawing out more tax receipts to interest payments.

“Ordinary revenues may be subject to change but even if the target foes up, the government is likely to fail in hitting the target,” he added.

Kenya’s debt service costs are expected to accelerate in the near term as the government commences repayments to a Ksh.162 billion loan the China Export and Import Bank (EXIM) covering the construction of the second phase of the Standard Gauge Railway (SGR) later this month.

At the same time, the National Treasury is expected to make its highest local debt redemptions across the 2020/201 financial year in the January at Ksh.174.7 billion.

The Treasury has however found respite from its participation in the Debt Service Suspension Initiative (DSSI) offered by leading external lenders including the Paris Club and G20.

From its participation, Kenya has cooled down debt refinancing pressure by bagging Ksh.32.9 billion in savings from the suspension of repayments falling due between January and June to the Paris Club.

Kenya hopes to tap another Ksh.40.6 billion from a repayments standstill by G20 countries.

The country’s stock of debt has also risen hitting Ksh.7.3 trillion in November as it paces towards the inevitable Ksh.9 trillion red line.

Kenya’s public debt stock is now expected to end the fiscal year to June at Ksh.7.7 trillion driven largely by increased domestic borrowing as the government struggles to raise revenue to finance an expanded budget.