Kenya Kwanza administration has allocated a budget of Sh7 trillion to pay off debt during its first term, starting from July 1. This highlights the significant debt burden inherited from previous administrations.
According to revised estimates from the Treasury, the cumulative cost of debt payments will amount to Sh7.071 trillion from the fiscal year 2023/24 to 2026/27. This indicates the impact of the heavy debt load.
Spending on interest payments is projected to reach Sh3.42 trillion, while redemptions, which will likely be refinanced through new debt, are estimated at Sh3.65 trillion over the four-year fiscal cycle.
Changes made in the second supplementary budget have increased the cumulative debt service costs, including the fiscal year ending on June 30, by a substantial Sh131.09 billion.
This reflects the impact of rising interest payments on external debt and redemptions over the medium term.
Total debt service costs are expected to reach a record high of Sh1.802 trillion in the fiscal year ending June 2024, compared to the current amount of Sh1.385 trillion. This increase is primarily due to the redemption of a Sh279.7 billion ($2 billion) debut Eurobond, which matures on June 24, 2024.
However, the debt service costs will gradually decrease thereafter, reaching Sh1.669 trillion in the 2024/25 fiscal year and Sh1.748 trillion in the financial year ending June 2026.
Debt service costs in the 2026/27 financial year will amount to Sh1.768 trillion. Interest expenses will be Sh891.8 billion, and redemptions will be Sh876.5 billion.
The majority of debt service costs are for repayments related to infrastructure projects carried out by the previous administration. The outstanding arrears for the Mombasa-Nairobi standard gauge railway project, for example, are Sh223.8 billion ($1.6 billion) as of June 30, 2022.
These payments also include the redemption of a Sh125.9 billion ($900 million) Eurobond maturing on June 22, 2027. Additional debt service costs are due to persistent budget deficits, which require financing beyond domestic revenue.
These upcoming interest payments are expected to put pressure on government revenues, consuming a significant portion of them.
In contrast, the large redemptions will necessitate additional borrowing by the government to offset the arrears through refinancing.
The Treasury plans to issue a new Eurobond to refinance the June 2024 maturity, and the process to settle the maturity has already begun.
The Kenya Kwanza administration will seek financing to cover new deficits in subsequent budgets, starting with Sh718 billion in the new fiscal year.
However, relying more on domestic funding in the fiscal cycle may affect the growth of private sector credit, as the government will be competing with businesses and households for bank loans.
Net domestic borrowing is projected to be Sh586.5 billion in the 2023/24 financial year, with net foreign financing at Sh131.5 billion, representing an 18:82 mix compared to the improved mix of 48:52 at the end of June 2023.
Despite the increasing debt service costs and persistent fiscal deficits, the government assures its ability to meet all maturities and interest payments. It aims to implement a fiscal consolidation policy primarily focused on expanding the tax base to generate higher tax revenues.
