Kenya’s creditors Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Republic of Korea, Spain and the US under Paris Club creditors have accepted to provide to Kenya a time-bound suspension of debt service due from January 1 to June 30, 2021.
“The Government of the Republic of Kenya is committed to devote the resources freed by this initiative to increase spending in order to mitigate the health, economic and social impact of the COVID19-crisis.
The Government of the Republic of Kenya is also committed to seek from all its other bilateral official creditors a debt service treatment that is in line with the agreed term sheet and its addendum. This initiative will also contribute to help the Republic of Kenya to improve debt transparency and debt management,” said the representatives of the Paris Club creditors.
Initially, the Kenyan Government had refrained from participating in the Debt Service Suspension Initiative (DSSI), despite growing concerns over its debt sustainability. Then, the concerns had been affirmed by elevated spending needs, linked to the COVID-19 response, amid underperformance in revenues which had led to a widening of the fiscal deficit towards double digits (FY2020/21 target = 7.50% of GDP) and record-high debt levels.
According to the World Bank, Kenya would save up to $802.6 Million (Ksh85.3 Billion) from the temporarily suspended debt payments. The G-20 Debt Service Suspension initiative was introduced in May last year by G20 countries when they offered to suspend debt services for external for middle-income countries.
Under the DSSI, countries also commit to limit their non-concessional borrowing as supported by ceilings under IMF programs and the World Bank’s non-concessional borrowing policies.
“In effect, the initiative apart from suspending the payments, will give us a total of five years to repay the loans, with a grace period of one year. This is not only timely, but a sign of confidence in the country and will give us the fiscal space to make the much needed spending on the COVID-19 economic recovery strategy especially in the social, health and economic sectors,” Treasury CS Ukur Yatani said.
Moody’s credit rating agency has stated that it will maintain Kenya’s negative credit rating into 2021 while the IMF and World Bank maintain that Kenya’s risk of debt distress is high.
Jared Osoro, a Kenyan Economist says the duration given by the Paris Club Creditors is short. “Some relief from a liquidity management standpoint. Six months is still a short period. With Chinese debt not being part of this, the NPV of the debt doesn’t change much.”
Similarly, Mohamed Wehliye, Advisor, Saudi Arabian Monetary Authority (SAMA) is of the view that the DSSI ‘is just a pain killer’.
“The DSSI (6 months repayment holiday) is just a pain killer. Dawanol. For immediate liquidity needs. It does not address debt sustainability problems. Next step is debt restructuring (a must). And that will require debt sustainability analysis (DSA) by IMF & straight to their ICU,” he tweeted.
“What will be painful for GoK and anyone that signs for the DSSI is the level of disclosures required,” he adds.