Kenya Remains at Low Risk of Debt Distress

Kenya is in a strong position to repay its creditors, the International Monetary Fund has reassured. This is despite envisaged risks on the country’s growth prospects due to the impact of external shocks and interest rate controls which has resulted to a slowdown of credit to the private sector.

IMF projects growth of 5.3% in 2017 and 5.8% in 2018, noting that this could be reduced by around 2% each year due to the limitations caused by the interest controls, Kenya News Agency reported.

The IMF said Kenya’s capacity to repay debt is affirmed on the planned medium-term fiscal consolidation by the government and ongoing reforms to boost economic growth.

“The bulk of the country’s external public debt carries concessional terms, but recent commercial borrowing entails significant repayment needs in 2017,” the IMF said last week in the first review under the twenty-four month stand-by arrangement and the arrangement under the standby credit facility.

The two programs are valued at $1.5 billion for two years from March 14, 2016. They are meant to cushion the country against external shocks, largely depreciation of the shilling.

The report praised East Africa’s biggest economy for sticking to spending targets, although it noted that this was partly due to the government not spending all funds earmarked for public investment.

According to the IMF, the country’s overall public debt had risen to about $16.1 billion (Sh1.65 trillion), equivalent to 26.4% of the GDP at the end of 2015.

The bulk of the external public debt carries concessional terms, but recent commercial borrowing entails significant repayment needs in 2017. These include a $750 international syndicated loan due in 2019 and the debut $2 billion sovereign bond which matures in 2024.

“The Debt Sustainability Analysis finds that Kenya remains at low risk of debt distress. However, as measured by the standardized stress tests under the DSA framework, the vulnerability to export shocks has increased,” the IMF said.

According to the IMF, policy measures may be needed to safeguard macroeconomic stability and debt sustainability if the envisaged risks materialize.

“In the event of an external shock, flexibility in the exchange rate, combined with the use of Kenya’s ample foreign currency reserves, would help avoid excessive volatility. Some further monetary policy tightening may be needed to prevent second-round effects on inflation.”