Rédaction Africa Links 24 with Daily Nation
Published on 2024-02-16 21:00:00
The Kenyan government’s decision to raise expensive debt to pay off maturing, cheaper debt has raised concerns about the long-term consequences of this approach. Critics argue that while this move may have averted default today, it will likely lead to even greater financial burden in the future.
The recent Eurobond issued by the Kenyan government carries an interest rate of 10.375%, a significant increase from the 6.875% interest rate on the 2014 Eurobond that is being paid off. This trade-off, from cheaper to more expensive debt, has raised questions about the government’s economic management strategy.
Furthermore, the successful issue of the new bond has been portrayed by the government as a vote of confidence in their economic management. However, critics argue that the high interest rate reflects the market’s low confidence in the government as an issuer.
Drawing parallels to personal finance, the move has been likened to picking up an expensive loan to settle a cheaper one, with the hope that financial fortunes will improve before the expensive loan becomes due.
Amidst these concerns, the new Eurobond has halted the freefall of the Kenyan shilling against the US dollar, with the exchange rate improving slightly to 156 shillings to the dollar. However, critics argue that this short-term benefit may be outweighed by the long-term costs of higher debt servicing.
While the current regime may argue that they inherited the debt problem, critics contend that the solution lies in their own economic management decisions. They argue that if Kenya’s credit rating had been improving and the regime had curbed its expenditure, the borrowing costs would have been lower.
Critics also point to the government’s comparison with President Kibaki’s debt management approach, noting that while Kibaki also switched debt, he did so by opting for cheaper debt and re-profiling the debt to create a proper yield curve. This approach led to increased private sector investment and was more conducive to economic growth.
In contrast, the current regime’s bottom-up economic management approach has led to short-term investments yielding higher returns, while longer-term investments have become less attractive due to the need for higher rates to attract investors.
The consequences of this debt management approach are evident in the substantial increase in public debt stock over the past 18 months, with both external and domestic debt seeing significant increases. The servicing costs for this debt are projected to be substantial in the coming years, with domestic debt accounting for a majority of the servicing costs due to higher interest rates.
The decision to raise expensive debt to pay off maturing, cheaper debt has raised concerns about the government’s economic management strategies and the long-term implications for the country’s financial health. As the debate continues, it remains to be seen how this decision will impact Kenya’s economic future.
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