Kenya

Nairobi, Aug. 23, 2023: Kenya’s debt repayment costs exceeded revenue from taxes and fees on services in the first month of the current year by Ksh4.9 billion ($33.8 million), pointing to a growing squeeze on public finances.

The Treasury spent nearly Ksh161.84 billion ($1.12 billion) on debt repayments in July, according to gazetted data on inflows and outflows from the government’s main account, surpassing Ksh156.94 billion ($1.08 billion) receipts from taxes and non-tax revenue from State services.

The debt repayment costs were nearly double Ksh83.93 billion ($579.6 million) in the same month last year, reflecting a rising risk of distress for Kenya in the current fiscal year.

This came at a time taxes rose 18.73 percent to Ksh155.07 billion ($1.07 billion), while non-tax receipts, including user fees on government services, fell 4.03 percent to Ksh1.87 billion ($12.9 million).

Kenya is staring at record-high external repayment expenses in the current year, underlined by growing dues to China and bullet Ksh301.51 billion ($2.08 billion) [as per budget books] redemption of the debut Eurobond.

The July debt burden was partly on account of increased repayment to the Exim Bank of China, the financier of standard gauge railway and other projects, whose repayments are estimated at Ksh111.93 billion ($773 million) in the current year.

Overall, the Treasury has budgeted Ksh112.39 billion ($777 million) towards repaying China’s debt, which increased from Ksh107.42 billion ($741.8 million) last fiscal year ended June 2023.

Kenya usually pays Chinese lenders in two batches in July and January every financial year.

The rising debt obligations have raised jitters among international investors over Kenya’s ability to refinance huge external repayments.

“Despite the government’s commitment to fiscal austerity, it may not be able to do enough to avoid a sovereign default over the next 12 months. External borrowing costs are prohibitively high,” analysts at UK-based Capital Economics wrote in a note on Kenya’s economic outlook on June 13.

Political pressures are likely to limit the extent to which the government tightens its belt. The key crunch point comes in June next year when large Eurobond payments are due.”

The headache of serving external debt has been heightened by aggressive interest rate hikes by central banks in rich countries in the battle against inflation amidst the sustained weakening of the shilling.

The Treasury was, for instance, forced to increase the budget for foreign debt repayments by Ksh27.23 billion ($188 million) to Ksh389.45 billion ($2.7 billion) days to the end of last financial year.

That budget is projected to jump 71.86 percent this fiscal year to Ksh622.47 billion ($4.3 billion), according to estimates by the Treasury.

The rising burden of debt servicing costs on taxpayers is a reflection of increased borrowing during the previous administration of Uhuru Kenyatta, in which President William Ruto served as Deputy, to build economic growth-enabling infrastructure such as roads, power lines and a modern railway line.

Kenya’s debt binge is underlined by Eurobond offerings, a package of Chinese loans and syndicated commercial loans over the years which are now squeezing its finances as the loans fall due.

The International Monetary Fund and the World Bank have since 2020 classified Kenya at a high risk of debt distress since 2020 as a result of a persistently large deficit in annual budgets in more than a decade, which is bridged through borrowing.

Dr Ruto has vowed to honour public debt obligations over other recurrent expenses in a bid to instil confidence in international investors of his intent to avoid a sovereign default.

The EastAfrican

The US and Kenya announced a trade and investment partnership in July 2022. Talks have been progressing on the way forward in nine areas, including agriculture, anti-corruption, digital trade, environment and climate change action, and workers’ rights and protections.

The Strategic Trade and Investment Partnership (Stip) will be the first significant trade partnership between the US and a country in Sub-Saharan Africa. Countries in the region currently rely on the African Growth and Opportunity Act (Agoa), which offers duty- and quota-free access to the US market. The new deal is seen as a model for future agreements between the US and other Sub-Saharan African countries.

The labour provisions proposed under the Kenya-US deal are not new. They have become standard features of all US free trade agreements since first appearing in the North American free trade agreement of 1994.

Kenya and the US undertake to work together to advance and protect labour rights through enforcement of and compliance with labour laws, promotion of social dialogue, and cooperation in other areas of mutual interest on labour and employment priorities, including with respect to forced labour in global supply chains.

There is currently very little information regarding the potential scope of the labour provisions. But there is reason to believe they will borrow heavily from precedents of the US-Mexico-Canada Agreement (USMCA).

Under the USMCA, Contracting Parties commit to four core international labour standards. These are: freedom of association and collective bargaining; elimination of all forms of forced or compulsory labour; effective abolition of child labour; and elimination of discrimination in respect of employment and occupation.

I have recently authored a paper on the labour issues raised in the proposed free trade deal between the US and Kenya. I have also studied China’s bilateral treaties and reviewed its trade deals with African countries.

Ordinarily, a trade agreement that aims at promoting workers’ rights should be welcomed. Kenya faces numerous obstacles to effective protection of the rights of workers despite having many laws with this aim.

But the imposition of stringent labour standards via a trade agreement raises concerns about: additional international obligations high implementation costs

Sovereignty hidden motives uneven playing field.

In my opinion, the inclusion of strong labour provisions in the Stip may have very little to do with protecting workers in Kenya. It may be more about sidelining China in Africa, protecting US jobs, and enhancing US soft power in the region.

1. International obligations

The controversy over the issue of trade and labour standards is not new. Nearly thirty years ago, developing countries rejected attempts by some industrial nations to subject labour standards to World Trade Organisation rules and disciplines. Introducing them through a free trade pact implies contracting states will be required to adopt and enforce global labour laws.

Including labour provisions in the Stip will have the effect of imposing additional commitments on Kenya beyond its current obligations as a member of the World Trade Organisation. Quite apart from the cost of implementation, imposing labour commitments through the backdoor of a trade agreement exposes Kenya to costly dispute settlement procedure and possible trade sanctions in event of a breach.

Read more on The EastAfrican

Nairobi, Aug. 15, 2023: Kenya’s energy regulator announced that the country had reinstated a small subsidy to stabilise retail fuel prices for the next 30 days.

The regulator, known as EPRA, announced late on Monday, a reversal of government policy following public anger over the high cost of living.

In September 2022, President William Ruto removed fuel and maize flour subsidies put in place by his predecessor, saying he preferred subsidising production rather than consumption.

The move was also aimed at cutting government spending as the government seeks to get a handle on debt repayments that have forced it to deny market speculation about a possible default.

However, the subsidy cuts and recent tax hikes have increased living costs and contributed to violent anti-government protests in recent months.

The energy regulator said the maximum retail price of a litre of petrol would remain constant at 194.68 shillings ($1.35), shielding consumers from an increase of 7.33 shillings, which the government will shoulder through a price stabilisation fund.

Daniel Kiptoo, the director general of EPRA, said retail fuel prices are set in the middle of each month adding that the government also applied small subsidies on kerosene and diesel.

Kiptoo said the move did not amount to a reinstatement of the subsidies, since the regulator was using the petroleum development levy to stabilise prices, rather than asking for exchequer support.

“We are basically giving to Kenyans the money that we have collected over the past couple of months,” he told Reuters, referring to the levy, which is charged at the rate of 5.40 shillings per litre of fuel.

Officials from the energy ministry and the finance ministry did not immediately respond to requests for comment.

Fuel prices shot up when Ruto removed the subsidies. They spiked again in July after the government pushed through parliament a contentious law that doubled the fuel tax.

The protests organised in response to that law were called off in July after the opposition and Ruto agreed to talks to resolve their differences, the second such attempt this year.

Nairobi, Aug. 11, 2023: The World Bank is providing more than 359 million Kenyan shillings (2.5 million U.S. dollars) to boost small and medium enterprises (SMEs) in Kenya.

Sameer Goyal, a senior financial sector specialist at World Bank Kenya said on Friday at the launch of the Kenya youth entrepreneur project in Nairobi, the capital of Kenya.

Goyal said 50 small enterprises would receive performance-based grant funding averaging 50,000 dollars each.

“We aim to increase innovation and productivity in the private sector so that firms can boost their competitiveness and revenue growth,” he said.

He revealed that Kenya would benefit from increased foreign exchange earnings as some of the firms are already engaged in export trade.

Juma Mukhwana, principal secretary in the State Department for Industry, said in a written speech that the financial assistance would be targeted at SMEs in manufacturing, agriculture, housing, and healthcare as well as the digital superhighway sectors.

He added that the funding would help develop a robust and resilient SME sector that can withstand local and global shocks.

The International Monetary Fund (IMF) has revealed a monetary policy consultation clause with the Central Bank of Kenya as it seeks to have a bigger say in the decisions taken by Kenya’s apex bank in its fight to contain runaway inflation.

In its latest report, the IMF says the Central Bank of Kenya (CBK) will consult with its executive board to set the monetary policy stance when the inflation rate persistently sticks above the 7.5 percent upper ceiling.

The clause, part of the ongoing arrangement between Kenya and the IMF, was first triggered in December after inflation stayed above 7.5 percent in the previous three months.

It was triggered again in June forcing the CBK to lift the benchmark interest rate, which is known as the Central Bank Rate (CBR), at an emergency monetary policy meeting.

“Inflation has remained outside our target band since June 2022, mainly driven by food and fuel prices. This led to non-observation of the programme’s Monetary Policy Consultation Clause (MPC), triggering a consultation with the IMF Executive Board,” CBK said in a letter attached to the IMF report.

The CBK is required to explain reasons why inflation has breached the upper limit and discuss with the lender potential policy responses and the outlook on inflation.

In December for instance, CBK told the IMF the main drivers of inflation were in part due to global shocks triggered by the war in Ukraine which affected the pricing of key commodities including fuel, wheat, edible oils, and fertilisers.

As part of policy responses, CBK noted it tightened monetary policy by increasing the CBR.

According to the CBK, monetary policy tightening would be complemented by fiscal measures taken to moderate the prices of specific commodities while it continues to monitor the drivers of inflationary pressures.

CBK Governor Kamau Thugge told the IMF that inflation would steadily come down and return to the targeted band in months, even as food and fuel prices present persistent pressure.

“CBK expects overall inflation to decline in coming months, and its return to the target band is imminent. The rate of decline, will, however, depend on how food and fuel prices evolve in the period,” he said.

Dr Thugge was forced into a jumbo interest rate lift within 25 days of taking charge of the apex bank following downside inflation expectations in June.

On June 26, the MPC lifted the benchmark interest rate to 10.5 percent from 9.5 percent, leaving the CBR at the highest rate since July 2016.

Inflation has already handed Dr Thugge his first tough test as food and fuel prices pressure explodes by impacting the cost of non-food non-fuel commodities- core inflation.

“Inflation is almost like a tax because it reduces everybody’s real income. Therefore, it is very important that we address the inflationary pressures with the idea of reducing the cost of living, which is one of the issues that has concerned the country,” he noted.

Inflation eased slightly in June to 7.9 percent from eight percent in May, but consumer prices are expected to increase in July, largely from the implementation of higher VAT on petroleum products at the standard rate of 16 percent from eight percent.

The EastAfrican

Kenya has secured a $500 million syndicated loan arranged by a consortium of five international lenders, with the proceeds expected to fund ongoing development projects approved in the just-ended financial year.

In a statement issued on Thursday, the lenders said the facility – as previously disclosed – is in two tranches of three and five years, but did not specify the respective amounts allocated to each tranche.

They also did not disclose the interest terms of the syndicated loan.

“The proceeds from the facility will be used by the National Treasury to finance the development projects as per the development budget approved by the Kenyan Parliament for the Fiscal Year 2022/2023,” the lenders said.

The earmarking of the proceeds for the 2022/2023 budget suggests that the funds will be used to settle part of the government’s outstanding bills, which stood at Ksh537.2 billion ($3.8 billion) at the end of March 2023.

The Treasury has been seeking the facility since at least March when it mandated CitiGroup of the US, Standard Chartered Bank of the UK and South African lenders Standard Bank and Rand Merchant Bank to arrange a $600 million facility.

However, the difficult international credit market has delayed the mobilisation of the funds, mainly due to high interest rates, which have also made it difficult for the country to access the Eurobond market.

In the statement, the four initial arrangers said that the Africa Export-Import Bank (Afrexim Bank) later joined them as book-runner and mandated lead arranger and allocated its subscriptions to the five-year tranche.

The fact that the State fell short of its initial target of $600 million even after bringing on board a fifth arranger points to the difficult external debt market, from which the government expects to raise a net Ksh199 billion ($1.4 billion) in the current fiscal year, while also funding the rollover of the maturing Ksh281 billion ($2 billion) Eurobond.

The EastAfrican