Ruto seeks debt reliefs as tough economy bites

President William Ruto on Wednesday night made a strong case for debt relief from the International Monetary Fund (IMF) and World Bank in his maiden speech to the United Nations.

Ruto said debt relief and rescheduling will give developing countries like Kenya the fiscal space they need to get out of the challenging economic environment caused by the Covid-19 pandemic.

Speaking during he United Nations General Assembly (UNGA), the President also called on G20 nations to suspend and reschedule debt servicing by middle-income countries.

Kenya’s economy — which is expected to grow at 5.4 per cent in 2022 on the back of Covid-19 pandemic shocks and other global challenges like the high cost of fuel — is expected to lose momentum next year and grow at a slower pace of five per cent.

Ruto’s government inherited a Sh8.6 trillion debt from the Jubilee administration in which he was President Uhuru Kenyatta’s deputy. Over the last decade, Uhuru’s government borrowed heavily to fund infrastructure development across the country.

The debt burden, which now threatens to hit the Sh10 trillion mark, is sending worrying signals across Kenya’s financial market, as outstanding maturities of Eurobonds and other debt instruments loom large.  “On behalf of Kenya, therefore, I join other leaders in calling upon the World Bank, the International Monetary Fund, and other multilateral lenders to extend pandemic-related debt relief to the worst-hit countries, especially those affected by the devastating combination of conflict, climate change and Covid-19,” Ruto told world leaders gathered in New York.

By the end of 2021, 40 per cent of Kenya’s debt was owed to multilateral agencies, including IMF, World Bank and The African Development Bank , according to Treasury data.

About 28 per cent was owed to other nations as bilateral loans, while 10 per cent was owed to commercial banks and 18 per cent to Eurobond investors.

“I urge the G20 to extend and expand the scope of the common framework to suspend or reschedule debt repayments by middle-income countries during the pandemic recovery period,” Ruto appealed.

The President said developing countries, being heavily burdened by external debt servicing, were aware of the risk of losing development gains due to the shocks inflicted by the pandemic and associated disruptions.

Urgent measures

“I call upon global financial institutions and international community to take urgent measures and release all existing financial instruments to provide much-needed additional liquidity and secure better fiscal space for developing countries like Kenya to enhance social investment, support climate change adaptation and mitigation, address security needs and resolve development financing challenges,” he told the gathering.

According to Bloomberg data, Ghana was the first African country to call for restructuring of debt with Kenya being in the top 10 countries that face debt distress.

Earlier this year, IMF said Kenya was at a high risk of debt distress after approval of the latest multi-lateral disbursements amounting to $1.21 billion out of a total of a $2.34 billion programme.

Sounding the alarm on Kenya’s high public debt, Central Bank of Kenya  governor Patrick Njoroge on Tuesday said continued borrowing to plug a Budget deficit was unsustainable. He asked newly elected Members of Parliament during their induction at Safari Park Hotel, Nairobi, to help manage the high public debt.

The weak shilling, which has hit a new low to exchange at Sh120 against the dollar, is also of concern even though the regulator said Kenya had sufficient dollar ratios to cushion the country.

However, high costs of energy — driven by a global recovery from the pandemic, Russia’s decision to cut Europe from its gas supplies following the conflict in Ukraine — continue to put pressure on oil prices.

Speaking to Bloomberg, Njoroge said Kenya was not in debt distress but was between medium to high risk, which he argued was not the same thing as being under debt distress. “The point is regardless of how we classify the debt; we need to do better by looking at more options in terms of non-debt financing options and towards concessional debt,” he said.

“Debt management is something that needs to be taken more seriously given the narrowing space that we have seen in a recent couple of months”. The governor expressed hope that through fiscal consolidation, the government can tame rising debt.

“Things will be tougher for a bit longer but the monetary policy will remain geared towards inflation price stability. Inflation remains a huge concern not only for Kenya,” the CBK boss said.

Tough choices

Among considerations to ease debt challenges, the governor proposed fiscal consolidation. If the government is to implement the fiscal consolidation amidst a worsening cost of living crisis, Kenya’s new president is unlikely to deliver on early economic promises.

At 70 per cent of GDP, public debt is not yet a crisis. However, President Ruto’s administration will need to manage cash flow by reducing leakages arising from corruption and other non-mandatory expenses.

The government will need to make tough choices on expenditure, especially with regard to ailing State parastatals, which have gobbled up billions of shillings in bailouts.

Most of these agencies are not profitable and the government could consider divesting from them.