World Bank warns Kenya on risk of expensive loans

The World Bank has raised the red flag over the high cost at which Kenya and other African countries are borrowing commercial loans, warning of future repayment difficulties if the debts are not invested in productive projects.

The World Bank Vice-President for Africa Hafez Ghanem, in a wide-ranging exclusive interview with the Business Daily, indicated that Kenya’s debt level has not yet reached a tipping point but raises concerns over low-yielding investments that do not generate enough tax revenue to repay the loans.

“I worry about increased indebtedness in Africa,” Dr Ghanem said in an interview shortly after meeting with President Uhuru Kenyatta at State House, Nairobi, this week.

“If a country wants to avoid a debt crisis, you need to make sure that the cost of borrowing is lower than the return on investment.”

Non-development financing

The World Bank advanced Kenya Sh75 billion for this year’s budget support, marking the first time that the Treasury has turned to the lender to seek non-development project financing.

Kenya’s public debt has risen rapidly in the past six years to the current total of more than Sh5.4 trillion, equivalent to nearly 60 percent of the gross domestic product (GDP).

The country owed the World Bank about Sh548.5 billion as at January, while Chinese loans totalled Sh620.6 billion in the same month.

The loans have been spent on projects such as energy, roads and the Chinese-funded Standard Gauge Railway (SGR) that has so far cost about Sh477 billion but is criticised for contributing little to the economy.

Kenya has in recent times borrowed expensive commercial loans such as the Sh25 billion ($250 million) syndicated loans signed in January with the Eastern and Southern African Trade Development Bank at a cost of the six-month London Inter-Bank Offered Rate (Libor) plus a margin of seven percent.
The six-month Libor was about 2.8 percent at the time, indicating total repayment cost of nearly 10 percent.

Another recent expensive debt is the Sh125 billion ($1.25 billion) loan signed in February at a cost of the six-month libor plua s 6.95 percent margin.

Kenya has in recent years also taken several Eurobonds, which are priced at commercial rates.

The Sh76.4 billion debut Eurobond retired last month, for example, cost taxpayers Sh22.5 billion in total or an equivalent of nearly 30 percent of the initial amount.

“The question is not how much debt you have, but what uses have you put this money to and what rates of return are you getting,” said Dr Ghanem, an economist.

“We in Africa need to look at this issue carefully and we need to make sure that we have debt strategies that are careful.”

The World Bank boss also challenged African countries to review their investment strategies to align loan-funded projects with the cost of borrowing.

Kenya, he says, needs to find a funding balance to repay the loans and finance development projects without resulting to cutting critical expenditure on education, health, social protections and security.

“Kenya’s revenue to GDP is around 15 percent, which is better than many countries but is way too low to meet the development objectives of the country,” he said, suggesting that he would be recommending to Kenya to “improve resource mobilisation” – a byword for more taxation – rather than a reduction in spending on social services.

In the June 13 Budget, Treasury Secretary Henry Rotich said he would set aside money for 100 percent transition from primary to secondary school besides funding cash transfers and health cover for the elderly.

The government has also signalled its intention to offer Universal Health Coverage (UHC) through the National Hospital Insurance Fund besides building affordable homes.

Already, Kenyans are paying graduated premiums for health insurance while a case on whether they should pay another 1.5 percent of their earnings to fund the affordable homes programme is pending in court.

The Kenya Revenue Authority has in recent years aggressively sought to expand the tax base but only about four million Kenyans had filed their tax returns by June out of a population of more than 45 million.

The taxman had collected Sh1.16 trillion revenue as at April, out of a full-year target of Sh1.605 trillion.

The low tax base has seen the Treasury grapple with a debt to revenue ratio of 54.74 percent, meaning more than half of the revenue collected is spent on repaying public debt.