After sitting on the fence, Kenya takes up debt-suspension offer

Kenya has agreed to take up the debt service suspension initiative (DSSI) after tiptoeing around the deal for months.

The Paris Club which represents an informal group of official creditors has disclosed Kenya’s application to join the initiative and its subsequent approval which will see Kenya enjoy a standstill on part of its external debt falling due between January 1 and June 30.

“In application of the term sheet of the Debt service suspension Initiative (DSSI) and its addendum also endorsed by the G20, the Paris Club recognized that the Republic of Kenya is eligible to benefit from the initiative. Therefore, the representatives of the Paris Club creditors have accepted to provide to the Republic of Kenya a time-bound suspension of debt service due from January 1 to June 30 2021,” the group said in a statement on Monday.

Kenya is set to save Ksh.32.9 billion in foreign debt repayments due to 10 bilateral partners under the Paris Club while the country further stands to save Ksh.40.6 billion from its DSSI application to the G20 presently under consideration.

“In effect, the initiative apart from suspending the payments, will give us a total of five years to repay the loans, with a grace period of one year. This is not only timely, but a sign of confidence in the country and will give us the fiscal space to make the much needed spending on the COVID-19 economic recovery strategy especially in the social, health and economic sectors”, Treasury CS Ukur Yatani said.

Kenya passed up the opportunity to join the first part of the initiative which run for a six months period to December 31, 2020.

This is as the government through the National Treasury deemed the initiatives terms as too restrictive.

Among Kenya’s fears at the time included the implications of the country’s credit rating after signing up to the offer along with limitations of accessing international capital markets.

“Some countries have faced challenges re-arranging debt service with creditors with undesirable outcomes. In this respect, Kenya seeks a cautious approach in evaluating the costs and benefits of the offer and make informed decision to safeguard the economic and financial standing of the country,” CS Yatani said on November 20.

However, the Paris Club which was part of the formation of the debt suspension initiative earlier in 2020 enhanced the terms of the DSSI to include the net present value (NPV) neutrality to participating countries meaning Kenya could not suffer a blow its credit rating for accepting the initiative.

The DSSI initiative was extended to least developed and developing countries as a means of alleviating debt vulnerabilities occasioned by the COVID-19 pandemic hit to economies around the world.

During the first phase of the DSSI, Kenya stood to save up to Ksh.75 billion in savings from the suspension of debt repayments in six months.

Kenya can still make the saving through reimbursements of the payments by its creditors, a term contained in the revised DSSI framework.

The pair of the Paris Club and the G20 have been pushing private creditors to participate in the initiative on comparable terms in a means to derive greater benefits to beneficiary countries.

Treasury however says Kenya will not be seeking a debt service suspension from its multilateral and commercial creditors to safeguard its sovereign rating and future access to international markets.

Kenya’s late participation in the imitative is also attributable to pressure from its external financing partners including the IMF and the World Bank.

Repayments suspended in the period will fall due over the next six years to include a one year grace period.

Kenya’s eligibility to the DSSI program stems from its qualification of financing under the International Development Association (IDA), its current debt service obligations to the IMF and the World Bank.

Kenya’s recent request for funding from the IMF also puts it in eligibility for the program.

Proceeds from the savings in the DSSI will be channelled towards fighting the COVID-19 pandemic.

“The Government of the Republic of Kenya is committed to devote the resources freed by this initiative to increase spending in order to mitigate the health, economic and social impact of the COVID19-crisis. The Government of the Republic of Kenya is also committed to seek from all its other bilateral official creditors a debt service treatment that is in line with the agreed term sheet and its addendum. This initiative will also contribute to help the Republic of Kenya to improve debt transparency and debt management,” the Paris Club added.