Kenya failed to take advantage of a more comprehensive debt payment pause offered by the Paris Club and G20 despite its biting debt problems, global rating agency S&P has warned.

Common Framework for Debt Treatment (CFDT) is a comprehensive arrangement over and above the first Debt Service Suspension Initiative (DSSI), which Kenya had earlier ignored, but later gave in to International Monetary Fund (IMF) pressure.

The new comprehensive arrangement had been designed to be country specific and would also involve the private sector which includes Eurobond holders.

“So far Kenya has not requested further relief under the more recent and more comprehensive Common Framework for Debt Assessment, also being led by the Paris Club and G20, which aims at more comprehensive debt relief than what is available under the DSSI,” S&P observed.

Eurobonds are perhaps the biggest risk in Kenya’s foreign debt portfolio given that they come with strict conditions and tend to hold countries at ransom when repayments are required.

Bilateral relief

Analysts had warned that the six month grace period was too short and the government will not be in a position to service the debt.

In January 2020, Kenya secured a debt payment pause from bilateral lenders amounting to savings of about $550 million (Sh60 billion) under the G20 and Paris Club’s Debt Service Suspension Initiative (DSSI).

“While receiving bilateral debt relief, it left private-sector commercial obligations such as Eurobonds unchanged,” the S&P report said in part.

Treasury Cabinet Secretary Ukur Yattani said Kenya did not want to get debt relief because of fear that the country’s credit rating could suffer while private bondholders could become jittery.

US financial news publisher Dow Jones noted that Kenya and other countries in the region could resort to broad based tax hikes to cover rising deficits.

“Further significant deteriorations in public finances triggered by stricter COVID-19 containment measures could push markets closer to debt distress.

This would curtail government spending and likely result in faster-than-planned tax increases targeting consumers and local businesses,” said Dow Jones in its 2021 Global Leadership Briefing.

Kenya’s external debt is now at Sh3.7 trillion with a total public debt at Sh7.3 trillion by end of last year. S&P warns that Kenya’s stock of general government debt net of liquid assets will rise to an average of 66.5 per cent of GDP in 2021-2024, from 52.5 percent in 2019 and 37.7 per cent in 2015.

Guaranteed debts

Debt servicing costs will increase and average a high 27 per cent of general government revenue in 2021-2024 says the ratings agency.

“Debt eligible to the treatment will include all public and publicly guaranteed debts which have an original maturity of more than one year,” the Paris and G20 countries noted in the Common Framework for Debt Treatment.

“The treatment necessary to achieve sustainability will take into account the cut-off date in the 2020 DSSI term sheet that protects new financing provided after 24 March 2020.”