David Cowan
Henry Rotich

Citi says Kenya needs IMF cover to float Eurobond

Kenya will need to agree on a new IMF standby facility before dipping into the international market for a new Eurobond in order to attract lenders and access the money at an affordable rate, a top economist at global lender Citi has said.

Citi chief economist for Africa David Cowan said on Tuesday that Kenya will most likely need to borrow heavily due to difficulties in achieving fiscal consolidation amid higher spending on the “Big Four” plan and slow revenue growth, hence the need for goodwill from the international lending market.

While the country can still issue a successful Eurobond without an IMF cover, the cost of issuance would be cheaper with the facility due to the lower risk rating arising out of the insurance the IMF offers against shocks.

“”To support this (borrowing) we still think the government will sign a new agreement with the IMF this year. We suspect his will be a standby agreement,” said Mr Cowan.

“The market still values an IMF deal, where it feels that when you have an IMF facility there are more people looking at the fiscal numbers and increased transparency in the data, and it also provides an external anchor to the fiscal consolidation path.”

One of the policy changes that the IMF has been pushing for in order to reach a new agreement with Kenya to replace the one that expired last September has been the removal of the rate cap on bank loans.

The Citi economist said pared to revise the law if it is to get a new IMF facility.

“This will mean the President has to spend some political capital in convincing parliament to make the changes,” said Mr Cowan.

Kenya’s fiscal deficit for the current financial year stands at Sh635.5 billion, financed by net external borrowing of Sh321.5 billion and domestic borrowing of Sh310 billion. Although the government has since January made strides on the domestic borrowing front, it has not had much traction on external loans.

Treasury is yet to issue an expected Eurobond amid concerns about costs, leaving the Treasury to look at a syndicated loan of at least $1 billion (Sh 100 billion) for new cash and rolling over maturing debt.

Treasury Cabinet Secretary Henry Rotich in the 2019 medium-term debt management strategy revealed concerns over the sustainability of Kenya’s foreign loans, conceding that the country needs to rebalance the borrowing mix from the current near-even split to a 62 to 38 percent ratio in favour of domestic borrowing.

In the 2019/20 fiscal year, Mr Rotich hopes to cut the deficit down to Sh578.3 billion, banking on a projected 13.6 percent increase in total revenue to Sh2.08 trillion, even as expenditure rises by 7.8 percent to Sh2.71 trillion.

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