Kenya has made a bold move to avoid a possible default on its debt by issuing a new international bond with a high interest rate of 10.375%. The bond, which matures in 2029, will help the country buy back most of its $2 billion bond that was due in June.
The decision to borrow at such a steep cost reflects the urgency and the challenges that Kenya faces in managing its debt burden, which has risen to over 70% of its gross domestic product (GDP). The country has been hit hard by the global economic slowdown, the locust invasion, and the political instability in the region.
Why Kenya Needs to Borrow More
Kenya is not alone in facing a debt crisis. Many developing countries have seen their debt levels soar as they borrowed heavily to cope with the fallout of the pandemic and the climate change. According to the World Bank, the average debt-to-GDP ratio of low-income countries rose from 43% in 2019 to 49% in 2020.
However, Kenya’s situation is particularly precarious, as it has to spend almost a third of its government revenues on interest payments alone. This leaves little room for investing in public services, infrastructure, and social welfare. Moreover, Kenya’s currency, the shilling, has weakened significantly, making it more expensive to service its foreign debt.
To ease its debt distress, Kenya has sought support from the International Monetary Fund (IMF), which boosted its program by $941 million in January. The IMF also approved a debt relief of $541 million for Kenya under the Common Framework for Debt Treatments, a new initiative that aims to help poor countries restructure their debt with official and private creditors.
How the Market Reacted to Kenya’s Bond
Despite the high interest rate, Kenya’s bond was well received by the market, as investors were looking for higher returns in a low-yield environment. The bond was oversubscribed by more than four times, attracting bids worth $6.1 billion.
The bond also helped Kenya boost its foreign exchange reserves, which were at just over $7 billion last week, barely enough to cover four months of imports. The swap also reduced the pressure on the shilling, which has appreciated slightly after hitting record lows in late 2021.
Analysts said that Kenya’s bond was a smart move to avoid a default and to improve its liquidity position. However, they also warned that the country still faces significant risks and challenges in the medium to long term.
What Lies Ahead for Kenya
Kenya’s bond may have bought it some time, but it is not a sustainable solution. The country will have to implement fiscal reforms, improve its revenue collection, and diversify its economy to reduce its dependence on external borrowing.
Kenya will also have to deal with the social and political implications of its debt situation. The high interest payments will limit the government’s ability to address the needs and demands of its population, especially the poor and the youth, who have been hit hard by the pandemic and the unemployment. The debt issue may also fuel political tensions and unrest, as the country prepares for the general elections in 2022.
Kenya’s debt crisis is a test of its resilience and its leadership. The country has shown that it can take bold and decisive actions to avert a default, but it will need to do more to ensure its long-term stability and prosperity.
Source: Reuters
