Kenya is at a high risk of external-debt distress as a result of foreign-currency obligations growing faster than income from abroad.
According to the National Treasury, the ratio of debt-service costs to exports will remain above the 21% threshold that the IMF recommended until 2025. Furthermore, the IMF in May raised Kenya’s risk of debt distress to high from moderate due to the impact of the coronavirus.
By the end of June, Kenya’s debt stock stood at 6.7 trillion shillings ($61.7 billion), translating to 65.7% of gross domestic product (GDP). Still, the cost of servicing these obligations will jump 28% to 904.7 billion shillings in 2020/21 from the previous fiscal year, as a result of an increase in foreign-debt redemption costs.
Horticulture and tourism, which are key sources of foreign income for Kenya, were bludgeoned by shutdowns in key markets and global travel restrictions. Additionally, diaspora remittances declined year-on-year in April and June, with the CBK saying those inflows will grow by only 1% for the whole of 2020.
On the other hand, Kenya’s earnings from exports of goods and services will decline to 9.9% of GDP in 2021/22 from an estimated 10.1% in 2020/21, according to the Treasury.
Furthermore, the depreciation of the Kenyan Shilling poses more risks to external debt-service costs. On Tuesday, 18th August 2020, the Kenyan Shilling touched a new record low of 108.6 against the US Dollar.
Bloomberg reports that the External-Debt Distress is further widened by Kenya’s debt structure, where a third of the total is made up of commercial borrowings such as Eurobonds and syndicated loans.