In the next Five years, Kenya Kwanza will spend Sh7 trillion on Debt repayment

The debt load inherited from previous administrations is highlighted by the government of President William Ruto’s budget of Sh7 trillion to pay debt in its first term from the financial year starting July 1.

The impact of a heavy debt load is evident in the Treasury’s updated estimates of public debt spending, which put the total cost of debt payments from the 2023–24 fiscal year to the 2026–27 fiscal year at Sh7.071 trillion.

The cost of interest payments has been calculated at Sh3.42 trillion, while the estimated cost of redemptions, which will likely be refinanced and paid off with new debt, is Sh3.65 trillion over the course of the four-year fiscal cycle.

In the fiscal year ending in June 2024, total debt service costs are projected to increase to a record Sh1.802 trillion from Sh1.385 trillion at present, reflecting the effect of redeeming a Sh279.7 billion ($2 billion) debut Eurobond that matures on June 24, 2024.

However, after that, the debt service costs will start to decline, reaching Sh1.669 trillion in the fiscal year 2024–2025 and Sh1.748 trillion in the fiscal year ending in June 2026.

In contrast, debt service costs for the 2026–2027 fiscal year total Sh1.768 trillion, including Sh891.8 billion in interest costs and Sh876.5 billion in redemptions.

The majority of debt service costs go toward repaying loans taken out to fund sizable infrastructure projects by the previous administration, including the Mombasa-Nairobi standard gauge railway project, which as of June 30, 2022, had outstanding arrears totalling Sh223.8 billion ($1.6 billion).

Additionally, the payments will be used to redeem a Sh125.9 billion ($900 million) Eurobond that will mature on June 22, 2027. Consistent deficits in succeeding budgets have necessitated financing outside of mobilizing domestic revenue, which has resulted in additional debt service costs.

Revenues are anticipated to be under pressure from the upcoming interest payments, which will likely consume a sizable portion of tax revenue.

In contrast, the substantial redemptions would force the government to increase its borrowing in order to refinance the arrears.

For instance, with the exchequer having already begun the process to settle the maturity, the Treasury is anticipated to issue a new Eurobond to refinance the June 2024 maturity.

“In preparation for the redemption of this maturing bond, the National Treasury…issued an expression of interest to bring on board a lead manager to advise the government on liability management options towards the resolution of the Eurobond 2024,” Treasury Cabinet Secretary Njuguna Ndung’u said last week.

The Kenya Kwanza administration is anticipated to seek financing to plug new deficits in succeeding budgets starting with Sh718 billion in the new fiscal year, in addition to borrowing to refinance.

The growth of private sector credit will, however, be put to the test as the government prepares to compete with businesses and households for bank credit as the fiscal cycle shifts to relying more on domestic funding.

For example, it has been estimated that net domestic borrowing will total Sh586.5 billion and net foreign financing will total Sh131.5 billion in the 2023–24 fiscal year, representing an improved mix of 18:82 compared to the previous year’s mix of 48:52.

“Although the debt burden has risen, Kenya has not accumulated debt service arrears and the government is committed to honour all public debt obligations as they fall due. Over the medium term, the revenue-driven fiscal consolidation policy stance is expected to improve the country’s debt sustainability ratios and debt carrying capacity,” CS Njuguna Ndungu added.