The European Union (EU) has joined multilateral institutions offering Kenya cheap loans to fight the Coronavirus disease and support small businesses running out of cash, bringing the total so far lent to Kenya to Sh214 billion.
The EU’s Sh7.8 billion support to Kenya – which has been struggling with huge commercial debts – adds to Sh22 billion from the African Development Bank (AfDB), the International Monetary Fund (Sh78 billion) and the World Bank (Sh106 billion).
The loans, which are usually long-term, low interest and have a grace period before repayment, will help the Treasury balance its books, which have lately seen Kenya use a third of all export earnings just to service commercial debts.
“We have been looking at our debt portfolio to see if there are ways to reduce the commercial loans with concessional ones. Of course the concessional ones are ready. You ask the World Bank to give you money, they will give it to you. You ask AfDB, they will give it to you and these are highly concessional loans. On average, the interest rates will be one or 1.5 percent with like five-year, ten-year grace period,” Treasury Secretary Ukur Yatani said.
He questioned the wisdom of borrowing commercial loans at eight percent, but said the Treasury had agreed with multilateral lenders to increase transparency on the use of the funds. For example, the EU loan is targeted spending that is ring-fenced around key areas. Of the amount, Sh1.2 billion will directly fund welfare support through cash transfers while Sh2.4 billion will be offered to SMEs as short-term working capital.
Another Sh600 million will be directed at maintaining supply chains for trade, ensuring food security and access to critically required medicines.
The Treasury will only have discretional space over Sh3.6 billion, which will be channelled through budget support towards containing the spread and impact of Covid-19 in the health, social and economic sectors.
Recent concessional loans from multilateral institutions come at a time when bilateral donors are also offering debt relief.
The Paris Club has for instance offered debt relief that could save Kenya Sh72 billion in debt servicing this year while China has also offered to pause payments for 77 developing countries to complement the G20 offer.
Commercial lenders on the other hand are adamant about concessions to developing countries with the Institute of International Finance (IIF) – an association of the world’s largest investment banks, insurance companies and asset management firms – warning that requesting debt relief from private players will have dire consequences.
IIF said negotiations will be between each borrower and lender, will take a long time and are not likely to succeed since they have a fiduciary duty to investors, not to mention contractual commitments and legal requirements. Rescheduling such loans will also hurt banks and insurance companies.
Countries seeking such reliefs will also face a credit ratings downgrade and risk investors calling up their entire loans.
A relief plan being proposed for emerging markets includes setting up a temporary bank and directing all interest payments to a credit facility that would then lend the interest back to governments at a cheap rate for efforts to combat Coronavirus.
The commercial lenders would then own a stake in such a credit facility to prevent defaults or the legal challenges expressed by IIF.
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