Inside Politics

Why Kenya rejected G20 Covid-19 debt relief plan

Monday, October 19th, 2020 00:49 |
The National Treasury building. Photo/PD/Alice Mburu

Kenya opted out of a G20 Covid-19 debt relief initiative in May on concerns it could attract a credit rating downgrade, the World Bank has disclosed.

The initiative would have postponed payment of more than Sh80 billion until next year but the amount also appeared to be limited compared to Kenya’s overall debt.

In April, the World Bank’s Development Committee and the G20 Finance Ministers endorsed the initiative to grant debt service suspension to the poorest countries and assist them in managing the adverse economic impact of the coronavirus (Covid-19) pandemic.

The debt relief was introduced as an option to create fiscal space for the poorer countries in the world due to the Covid-19 pandemic.

“The debt relief initiative was devised as another element in the policy makers’ toolkit to redirect resources to fight the pandemic,” World Bank said in its latest Africa Pulse report.

Kenya’s total debt rose past the Sh7 trillion mark in August to stand at Sh7.1 trillion from a flat Sh6 trillion at the start of 2020, latest government data shows.

The highest accumulation of the debt was recorded between March and August 2020 due to the pandemic.

World Bank grades Kenya’s risk of debt distress as high, compared to Tanzania and Uganda with a ‘low’ risk of debt distress.

Kenya has the largest fiscal deficit in Africa at 7.5 per cent followed by South Africa at 7 per cent.

Of the 73 eligible countries at the time the programme was announced, 38 are in sub-Saharan Africa.

“Only 28 countries in the region have signalled that they will participate in the  debt service suspension initiative (DSSI),” the report said adding that other countries shied away.

The total potential relief for these 28 countries would amount to $5.2 billion (Sh520 billion) with about half of this amount being the potential savings for Angola, the sub-Saharan African country that benefited the most from this initiative.

For instance, the initiative allows the eligible countries to suspend principal or interest payments on official bilateral debt from May 1 through the end of 2020.

Released resources

Treasury officials did not respond to Business Hub’s request for a comment on the matter.

The World Bank report says the risks associated with the participation may prevent countries from seeking additional relief.

These risks are: applying for the DSSI may lead to downgrades in the country’s sovereign credit ratings plus the argument that the amount of released resources is very limited for the eligible countries.

The other concern was that it is not easy to coordinate among private creditors, in the event of their participation, due to their profit-seeking nature.

As of September, 43 of the 73 eligible countries have signalled their participation in the DSSI. 

Eligible countries have not fully embraced the idea due to the prospects of credit rating downgrade and preference for keeping their access to global financial markets by repaying their obligations.

They fear that any suspension of interest payments may trigger sovereign ratings downgrades and restrict future access to private creditors.

Countries with outstanding Eurobond stocks are also reluctant to join the move, due to the stringent terms of their Eurobond payment plans.

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