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IMF:Kenya’s chances of defaulting on loans increase

International Monetary Fund (IMF) has warned Kenya risks defaulting on international loans as it falls by two steps.

In a report released on Tuesday, the IMF noted that the country’s risk of defaulting on debt repayment had increased from low to moderate.

Imminent repayment of a huge external debt, including part of the 2015 Eurobond, is likely to pile pressure on the country’s revenues.

Austerity measures

The report explains that the Government has aggressively instituted austerity measures, hitting Kenyans with hefty tax bills, including the eight per cent Value Added Tax on petroleum products.

It also explains the freezing of development projects and the ongoing crackdown against graft and wastage that has seen a number of high-ranking Government officials arraigned.

Money transfers, telephone and data services have not been spared from the Government’s aggressive measures to raise more revenue.

An important belt-tightening measure spelled out recently includes the move by Treasury to shun expensive commercial loans such as Eurobond and syndicated ones from commercial banks.

Big Four agenda

Instead, Treasury hopes to fund future projects using cheap loans from development partners such as the World Bank and IMF, and working with the private sector to realise its ambitious Big Four agenda.

In the Financial Year ending June 2019, Kenya is expected to repay Sh250.3 billion ($2.5 billion) of its external debt, including a Eurobond repayment of Sh78 billion issued in 2015.

Financial experts warn that since virtually all external debts are denominated in foreign currencies, mostly the US dollar, Kenya’s foreign currency reserve will need to be formidable for the country to be able to repay from its coffers.

In the absence of enough reserves, Kenya will have to borrow additional dollars to offset these loans, in what is known as refinancing.

In a separate statement, the Government reluctantly admitted that it would be difficult to get concessionary financing.

Treasury noted that the country had accumulated commercial loans with a short maturity period, a situation that will put pressure on the country’s finances.

The IMF, which has in the past warned against Kenya’s ballooning public debt, said the country’s external debt distress has left it in a delicate situation, where any slight external disturbance such a drought or increase in the global oil prices could plunge it into a financial crisis.

“The higher level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly one-fifth of revenue,” said IMF.

Although the shilling has held on steady against the US dollar, trading at an average of 101 against the green buck for close to seven months, an improved US economy is likely to put some strain on the Kenyan currency.

Negative sentiments by the IMF might not bond well with investors.

Transaction advisers to the Eurobond told bond holders: “Statements made by the IMF may contain adverse information that could negatively impact the price of the notes.”

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