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Kenya risks losing billions on external interest rates

21 November 2014, 09:09 Samuel Kisika

Nairobi - The Parliamentary Budget Office (BPO) has warned that the country might incur a high external interest rate payment in coming five years following the Treasury’s decision to raise the external debt ceiling to KES 2.5 trillion.

The BPO deputy director, Martin Masinde, whose office advises MPs on economic and fiscal policies, said the doubling of the ceiling from the current KES1.2 trillion will have an impact on interest payment.

Masinde told the National Assembly’s Finance, Planning and Trade committee chaired by Ainamoi MP, Benjamin Lang’at that the country is expected to pay KES 147 billion in interest out of which domestic debt accounts for KES 122 billion and external debt KES 24 billion in current financial year.

“It is not clear on what the total estimated amount required external debt stock is for in the rest of the financial year 2014/15 since the scenarios exceeds the current ceiling by KES 30 billion. The proposed ceiling is therefore too high,” said Masinde who wondered why the government intends to double the ceiling when it only needs KES 30 billion to finance its flagship projects.

He reiterated that the Treasury is seeking external funding after exhausting all its borrowing avenues in the domestic market whose debt stands at KES1.26 trillion.

The Treasury has presented to Parliament sessional Paper number 14 of 2014 for approval to increase the debt ceiling in order to increase the recently issued sovereign bond for an amount not exceeding $750 million.

The funding is to go towards ongoing development projects that include KES 327 billion for Standard Gauge Railway, Lapsset, 10,000 kilometer roads, the 5000 megawatts of electricity and irrigation.

Treasury Cabinet Secretary, Henry Rotich, said the total disbursed outstanding nominal external debt stock stood at KES1.045 trillion against a set statutory ceiling of KES1.2 trillion as at the end of September 2014.

However, Rotich in defending the government’s plan to double the borrowing, presented two scenarios of borrowing with the first surpassing the debt ceiling by KES30 billion and the second by KES 8 billion.

Read Also: Kenya Power secures $190 mln loan for infrastructure upgrade

“In as much as rebasing of the GDP encourages a country to access more external debt finance, a ceiling of KES 2.5 trillion would be estimated at 53 per cent of the rebased GDP and this is excluding domestic debt. It would therefore mean that most of the revenue would go to debt servicing,” said Rotich.

Masinde faulted the Treasury’s borrowing intention arguing that the sustainability of the debt repayment could pose a challenge citing that the tourism sector is almost collapsing and Kenya’s exports are insignificant.

He added that the interest repayment for domestic debt accounts for 2.21 percent of the GDP while external debt is 0.44 percent of GDP.

“In the next five years, interest on external debt repayment will go up than what we have today. Our concern is that the money to be borrowed must be directed to the intended purposes,” said Masinde.

He also raised concern that the development finances to County governments are yet to be utilized five months into the financial year.

“We need to get realistic performance of the economy. Export performance is struggling just like tourism. The returns on investments must be big enough to repay the debt,” said Masinde.

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