IMF exit and eurobonds raise questions over Kenyan debt

Kenya’s move to tap the commercial debt markets in February, and the country’s early exit from an IMF programme in March, has sparked renewed debate on how the country is tackling its debts.

Kenya floated an 11-year $1.5bn eurobond to finance the early retirement of a $900m note maturing in 2027. A total of $593.3m from the proceeds of this issuance was used to partially buy back the $900m note, while the balance was earmarked for the repayment of syndicated commercial debts due in March, the Treasury said.

Further questions were raised about the country’s debt profile when it was announced in March that Kenya will exit its $3.6bn IMF programme before the final review stage, which would have unlocked a remaining tranche of $850m. Reports suggest that the Fund was unimpressed with progress made by Kenya to curb spending and improve tax collection.

Together, the moves appear to be a further sign of Kenya shifting towards commercial sources of funding. Last February, Kenya also sold $1.5bn of Eurobonds to partially retire a maturing $2bn note. The next significant sovereign maturity is a $1bn bond due in 2028. It is estimated that Kenya needs about $26bn over the next decade to settle maturing foreign debt and another $1.5bn annually to service external interest payments.

Kenya’s external debt in January stood at $39.4bn while domestic debt was Sh5.93tn ($45.8bn), according to the budget policy statement presented by the Treasury to Parliament in March. Multilateral lenders such as the IMF and World Bank accounted for 55.6% of external debt, while bilateral lenders led by China held 21.4% of external debt. Commercial loans, the bulk of which include Eurobonds, surpassed bilateral loans, with a 23% share of external debt.

Markets accommodative

The good news is that commercial investors were somewhat accommodative, and this was reflected in the returns that they demanded in the latest Eurobond issuance, argues Churchill Ogutu, an economist at asset manager IC Group.

“Compared to the Eurobond 2031 that was issued last year with a coupon rate of 9.75%, Eurobond 2036 with a slightly longer tenor has a comparably lower coupon rate of 9.5%. This implies a much favourable risk sentiment compared to a year ago,” he told African Business.

He argued that the central bank’s recent relaxation of monetary policy and the Kenya shilling’s stability over the past year have fuelled bullish sentiment among commercial lenders. 

Investor confidence also received a boost in January following a move by global ratings agency Moody’s to upgrade the country’s outlook to “positive” from “negative”, citing a potential ease in liquidity risks and improved debt affordability.

Concern at IMF programme exit

While Eurobonds and other commercial loans are proving to be an expedient way of refinancing Kenya’s mounting liabilities, some experts warn that overreliance on them is straining the country’s relationship with concessionary lenders such as the IMF and the World Bank.

Kenya’s $3.6bn funding programme with the IMF, signed in 2021, was set to expire in April. In March, following an IMF review, it was confirmed that Kenya will not proceed with the final review of this facility. Instead, it is seeking a successor programme.

“The Kenyan authorities and IMF staff have reached an understanding that the ninth review under the current extended fund facility and extended credit facility programs will not proceed. The IMF has received a formal request for a new program from the Kenyan authorities and will engage with them going forward,” the lender said in a statement following a staff visit in March led by mission chief Haimanot Teferra.

Opinion remains divided on whether Kenya can secure a successor programme given it did not meet some of the key benchmarks of the IMF’s outgoing program. Authorities have, for instance, struggled to boost tax collections, sell off struggling state-owned enterprises, and rein in borrowing from expensive commercial sources. The fiscal deficit has also widened, coming in at 5.02% of GDP, according to the Treasury’s latest projections. There was an agreement with the IMF that this figure would not exceed 4.3% in the current fiscal year.

Reliance on commercial loans questioned

Samuel Onyuma, an associate professor of investments and capital markets development at Laikipia University in Kenya, says that it is important for Kenya to secure concessional lending rather than relying only on commercial loans. 

“Commercial debt carries high borrowing costs and short maturities, which can exacerbate Kenya’s debt vulnerabilities,” he says.  

Onyuma tells African Business that over-reliance on commercial sources of credit could push up Kenya’s borrowing costs, derailing progress on some of the reforms that authorities committed to in the country’s existing loan programs with the IMF and World Bank. This could jeopardise access to cheaper concessionary loans from these Washington-based institutions.

“We should not lose the opportunity to have cheaper loans which are having long term maturities by going full throttle on those commercial loans. We need a balance,” he said.

Onyuma contends that access to concessionary funding not only lowers overall borrowing costs – freeing up resources for development and social programs – but also provides an opportunity to entrench economic policies that foster long-term stability.

“These programs involve some policy reforms which are targeted towards strengthening economic stability, improving public finance management, and promoting sustainable growth. They can provide a framework for sound economic policy and building investor confidence,” he said.

He conceded that some IMF-backed reforms, while beneficial in the long-term, were in the short-term “politically sensitive and difficult to implement.” 

This was evident last year when President William Ruto’s administration shelved plans to hike taxes following fierce public opposition, which culminated in deadly protests in June and July.

Raising taxes key

Onyuma argues that, regardless of how negotiations to secure renewed IMF support play out, efforts to boost tax collection must not be abandoned. “We should prioritise fiscal consolidation. It is serious. We need strong revenue mobilisation,” he says.

He maintains that generating additional tax revenues to pay down debt and support public spending provides Kenya with the clearest path towards debt sustainability and economic stability. The opposite approach – refinancing maturing debt – only provides short-term relief while sinking the country further into debt, he stressed.

Onyuma says that bringing Kenya’s informal sector into the tax net could greatly improve revenue performance. “We are not able to marshal revenue from this sector. We either do not put in place systems to collect taxes or our tax system is somewhat complex. Simplification of tax procedure is key as people in the informal sector often lack capacity to comply.” 

He noted that the Kenya Revenue Authority’s (KRA) move to embrace digital systems to boost compliance in the informal sector was a step in the right direction. He called for more digital transformation in tax administration, with the caveat that digital tools “should not be used as a punitive measure but as a way of making it easier to pay tax.”