East African countries embark on lending frenzy to fill huge budget deficits


By ALLAN OLINGO

East African economies are starting the new year with a borrowing frenzy with their eyes riveted on commercial debt to boost their economies out of the downturn in the Covid-19 pandemic.

Kenya, Tanzania and Uganda have indicated they will be in the market as early as this month for a mix of sovereign bonds, syndicated and commercial loans as they seek to support their budgets, which have to huge deficits, amid impending loan repayments for ongoing infrastructure projects. .

Kenya plans to issue two new sovereign bonds over the next six months to fund the budget and repay part of its inaugural Eurobond issued in 2014.

Kenya’s National Treasury told the International Monetary Fund (IMF) last week that it plans to launch an issue under the external component of budget financing for the current fiscal year, and another by June 2022. to refinance the 10-year $ 2 billion bond issued. in 2014.

Nairobi is seeking $ 2.19 billion in the two commercial loans.

Last June, Kenya issued a $ 1 billion bond.

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Kenya is expected to return to the Eurobond market in the first half of 2022 to raise funds, with $ 1.1 billion in the 2021/22 budget, as well as a takeover bid for part of the $ 2 billion. of dollars 6.875%, 2024 Eurobond. The Treasury is considering issuing in euros, ”says the latest Sovereign Debt Radar from REDD, a data and market intelligence company.

Nairobi is also considering lifting the debt ceiling of $ 78.9 billion set two years ago, as its debt stock of $ 67.5 billion is on the verge of exceeding that target.

The government had planned to borrow $ 5.49 billion domestically in the year ending June 2022, and as of December 10, it had already borrowed more than half of that amount, or 2.77 billions of dollars.

Modification of the debt ceiling

Loan servicing expenses are set at $ 5.46 billion, of which $ 2.33 billion will be principal repayments of domestic debt.

In November 2021, the Treasury submitted to the Attorney General and Parliament a proposal to change the debt ceiling under the Public Financial Management Act.

According to the IMF, the new debt anchor will be set at 55% of GDP, with debt being measured in terms of present value.

Kenya’s overall public debt has increased in recent years. Gross public debt fell from 44.4% of GDP at the end of 2015 to 71% of GDP at the end of 2020, reflecting high deficits, in part due to past spending on large infrastructure projects, and in 2020 by global shocks of Covid-19.

About half of Kenya’s public debt is owed to external creditors.

In the third quarter of its fiscal year, Nairobi paid $ 262.5 million to Chinese creditors to lift the deadlock on debt repayments. Payments were made to Chinese lenders, most notably Exim Bank, after suspending disbursements for projects in Kenya due to Chinese pushback to Kenya demanding a suspension of debt repayment.

In January 2021, Kenya applied for the G20 Debt Service Suspension Initiative (DSSI), as it finalized details of an Extended Finance Facility (EFF) and Extended Facility program. $ 2.4 billion three-year credit facility (ECF) with the IMF, which was approved in April.

DSSI’s request, which allowed Nairobi to receive $ 425 million in relief through December, added to existing tensions in its relationship with China, its largest bilateral creditor.

While the Exim Bank of China is a widely recognized bilateral creditor, its $ 3.6 billion loan to Kenya for the construction of the standard gauge railway has been extended on commercial terms, hence the insistence of Beijing to be treated on an equal basis with other commercial borrowers.

In Budget 2021/2022, Kenya set aside $ 1.03 billion to service its debt to China, including $ 217.1 million in interest payments and $ 817.6 million in repayments. , according to budget documents.

This year Nairobi will only receive $ 89 million in debt relief, lower than the $ 379 million originally planned, Treasury Cabinet Secretary Ukur Yatani said in a recent letter to the IMF.

Kampala in the market

Across the border, Uganda is also in preliminary talks with lenders for a new $ 500 million syndicated loan that is expected to be launched before April 2022.

Kampala has already sent out a request for proposals to lenders, but no bank has yet been appointed. It is understood that Uganda is looking for a 10 year facility, but it is unlikely to achieve such a long maturity period.

Uganda has yet to issue a Eurobond, although it has been approved by major credit rating agencies since 2013. It was active in the international syndicated loan market in March 2021 when it was first released. signed a $ 200 million seven-year facility with Societe Generale and East and South Africa. Bank of commerce and development. Kampala had requested a syndicated loan of $ 351.8 million.

REDD analysts said in December that although a Eurobond issue for Kampala is unlikely in the near term, the domestic bond market has attracted increased inflows over the past 18 months, as non-resident holdings increasing rapidly in the second half of 2020 and the first half of 2021.

“Although the stock of non-resident domestic debt holdings is still significantly lower than Ghana’s in terms of GDP and total market share, potential withdrawals could still be destabilizing due to the smaller size of the financial sector. “, he added. REDD report says.

Uganda’s total public debt is valued at $ 14 billion while the debt-to-GDP ratio is just under 50%. Overall debt repayment expenditure represents more than 15% of the total budget.

Tanzania has also indicated that it will seek loans in the new year to carry out its ambitious infrastructure projects, days after signing a contract with Turkish company Yapi Merkezi for the construction of a section 368 km of its standard gauge railway, which will be financed by loans. and is expected to cost $ 1.9 billion.

President Samia Suluhu said Tanzania would borrow to finance the project.

“We will find friendly loan facilities and the best way to get loans. We will not get this money from levies or internal taxes. We will continue to implement projects despite efforts to discourage us from borrowing. Even developed countries have debts. We will borrow to complete the development projects that we have initiated, ”she said.

In February 2021, Tanzania launched a $ 200 million seven- and ten-year loan in syndication.

Dodoma is keen to keep its infrastructure investments on track and is building, among other things, a high speed standard gauge railway from the port of Dar es Salaam to the hinterland border with Rwanda.

Tanzania’s stance on borrowing comes amid growing debate over the country’s new lending frenzy, which Speaker of Parliament Job Ndugai has called “unhealthy”.

Mr. Ndugai argued that the country cannot rely on external borrowing to support its large infrastructure projects, instead proposing the use of internal revenue.

“Is it appropriate for us Tanzanians to continue to borrow and increase the national debt which currently stands at around $ 33.8 billion or will we agree to shoulder the burden ourselves?” Asked Mr. Ndugai.

“Should we continue to borrow and sing praises once we get the loans or should we continue to charge direct debits whether people are ready or not, but the end goal is to build our infrastructure with our own money? “

For the past four years, Tanzania has taken out syndicated loans to advance its infrastructure plans. In August 2017, she turned to Credit Suisse Bank for a five-year $ 500 million loan and returned to the market two years later to apply for a $ 1 billion syndicated loan from Trade and Development. Bank.

Since March 2021, when President Samia took power, the country has received more than $ 3 billion in debt, including concessional loans and aid funds from the World Bank, IMF and the Bank. African development.

BoT data

The latest data from the Bank of Tanzania (BoT) shows that Dodoma plans to borrow at least $ 2.34 billion from foreign financiers to finance its 2022/2023 draft budget of $ 17.1 billion.

According to Finance Minister Mwigulu Nchemba, $ 1.32 billion of the 2022/23 budget will be financed by direct concessional loans and grants from development partners under the traditional general budget support agreement.

An additional $ 1.04 billion will come from project-specific commercial loans from international lenders, Nchemba said during the presentation of the 2022/2023 budget proposals to parliament in November.

The government will borrow an additional $ 2.32 billion from the domestic market to secure at least $ 12.4 billion in domestic funding from its 2022/2023 budget to balance external funding.

Tanzania’s total national debt stands at $ 33.88 billion, with the latest BoT report showing the national debt increased by $ 182.3 million at the end of August compared to July.

External debt represented 76.6% of the stock (at $ 25.95 billion), while external debt service payments stood at $ 27.8 million in August 2021, of which 18 Millions of dollars were spent on paying principal and the rest on repaying accrued interest, the central bank said. A total of $ 4.63 billion has been allocated to repay the public debt in the 2021/2022 budget, representing 29% of total spending.

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