Kenya eschews G20 debt relief initiative over restrictive terms

Kenya will not seek a suspension of debt payments under a G20 initiative aimed at helping poor countries weather the COVID-19 pandemic, its finance minister said on Friday, saying the terms of the deal were too restrictive.

Minister Ukur Yatani told Reuters in an interview he was also concerned about the impact that debt relief might have on Kenya’s credit rating.

The Group of 20 major economies last month agreed to suspend payment obligations on bilateral debt owed by their least developed counterparts through the end of the year. The goal was to free up more than $20 billion that poor governments could use to buttress their health services.

But Yatani said he was concerned that terms of the deal limiting countries’ access to international capital markets during the standstill could hinder Kenya’s ability to finance its deficit later in the year.

“We fear we might unnecessarily create a crisis,” he said.

The East African nation is instead engaging creditor countries including Germany, Sweden, Japan, China and France individually with the goal of securing moratoriums on debt service payments lasting around a year.

“We have not concluded (negotiations), but it is progressing well,” he said.

The G20 initiative only covers official bilateral debt, though it calls for the voluntary participation of private lenders on comparable terms.

A third of Kenya’s 3 trillion shilling ($28 billion) external debt is owed to private creditors including holders of the country’s two Eurobonds

“The G20 debt relief initiative does not offer optimal benefit given the structure of Kenya’s debt portfolio,” he said. “Every country adapts to the situation based on its own circumstances.”

The pandemic has caused the government’s budget deficit to swell to 8.2% of GDP in the financial year to the end of June, from an initial forecast of under 7%, mainly due to reduced tax collection and foregone revenue in the form of VAT and income tax cuts.

But the deficit is projected to narrow to 7.3% - equivalent to 823.2 billion shillings - in the 2020/21 fiscal year and to 4.2% of GDP by 2023/24, Yatani said.

“Kenya is taking a cautious approach of seeking debt relief from bilateral creditors to safeguard its sovereign credit rating,” he said.

Moody’s downgraded Kenya’s outlook to negative from stable on May 7 citing the shock caused by the COVID-19 pandemic to its tourism industry and farm exports.

On Tuesday, the IMF raised it’s risk of debt distress to high from moderate.

The minister sought to assure investors, saying: “We have adequate reserves to manage our payments for the next one year.”

The government has included a 55 billion shillings stimulus package aimed at preserving employment and consumer demand in the budget for the next fiscal year, which will be presented to parliament on June 11.

The cash will go towards grants for small businesses such as hotels and nature conservancies hard hit by the collapse of tourism.

The economy is projected to grow by 3% this year, falling to 2.5% if the crisis worsens, down from an initial forecast of more than 6%, Yatani said.

He attributed the forecast, which is higher than that of the IMF and the World Bank, to adequate rainfall across the country which will boost food production.

($1 = 107 Kenyan shillings)