The International Monetary Fund (IMF) now says that Kenya faces a moderate risk of debt distress. The fund has just raised its assessment of the chance of Kenya’s external debt distress to moderate from low, a situation it attributes to increasing refinancing risks and narrower safety margins.
Whichever way you look at it, this a significant pronouncement. First, the IMF has blown up the balloon the National Treasury has been flying by persisting in the belief that our public debt situation is still sustainable. We are hearing from a credible third party- the IMF- that things are headed in the wrong direction in so far as the country’s external debt position is concerned.
You can argue that there is nothing new in what the IMF has said because we have known all along that our debts have mounted to worrying levels. But the pronouncement that the Fund has made about our currency is even more significant. The fund has found that the shilling is over-valued by 17.5 per cent.
The fund now says that Kenya’s currency is ‘managed’- not market-determined- and has been artificially kept where it is by regular interventions by the Central Bank of Kenya(CBK). Kenya’s forex regime is being reclassified by the IMF from a floating regime to a managed regime. When markets, investors and trading partners perceive your currency to be artificially propped, the situation introduces uncertainty in our foreign exchange regime.
Still, me thinks that the recent massive influx of diaspora remittances, mainly driven by immigration policies of the Trump administration have also been a major factor in artificially propping our currency.
If our currency is over-valued by 17.5 per cent as the IMF says, it means what the signal the fund is sending is that it believes that the foreign currency component of our debt is much higher.
The fund believes that the shilling’s value of revenues that National Treasury secretary Henry Rotich needs to pay his dollar loans will also be higher. The implication of what the fund is saying is that we could sooner or later find ourselves tipping into an even worse debt distress situation. What are the broader implications in terms of direction for macroeconomic policy? We urgently need to control our appetite for commercial external loans.
It will require a ruthless pruning of projects that expose us more to commercial debts. And, resorting to the Public Private Partnership (PPP) model will not be an easy alternative as the administration of President Uhuru Kenyatta.
The truth of the matter is that PPP projects directly add contingent liabilities on the public’s balance sheet. We must now rethink the PPP route if we are to avoid tipping into a worse external debt situation.
We must go slow on Chinese loans. If you think I am exaggerating the China factor in our growing indebtedness, take a look at what the government disclosed in the prospectus that it put out for the recent Eurobond, It disclosed that during 2017, various ministries such as the Ministry of Energy and Kenya Power entered into a series of loans with Exim Bank China amounting to a total of $1.2 billion and 3.4 billion Chinese Yuan.”
This means that, in just one year, ministries signed shady commercial contracts worth billions of dollars.
If you are in doubt that we are gradually sinking into the Chinese debt trap, just grab a copy of the of the recent documents that Mr Rotich tabled in Parliament.
We have taken too many Chinese loans. While the huge loans to finance the standard gauge railway are what hits the headlines, we have also borrowed heavily for projects of little economic impact — such as loans to procure equipment for the National Youth Service (NYS) and to purchase drilling materials — from China.
Going through the external debt register, you will be surprised at the sheer number and size of loans we have taken for all manner of projects — such as for buying MRI equipment, procuring of power materials, rehabilitation of technical institutes, modernisation of Kenya Power distribution systems and building Kenyatta University.
It is a reflection of the power and influence that Chinese companies wield. Indeed, Chinese contractors are more adept at putting such deals together and in having financing approved by the Treasury.
SOURCE – Business Daily