Kenya secures 85 billion shillings loan from World Bank as cost of external debt doubles


Economy

Kenya secures 85 billion shillings loan from World Bank as cost of external debt doubles


President Uhuru Kenyatta with World Bank Country Director for Kenya, Keith Hansen. PICTURES | PSCU

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Summary

  • The loan is the second tranche granted to the country after the World Bank transferred a similar amount in June last year under the Development Policy Operation (DPO) programme.
  • The World Bank said the concessional loan will have an annual interest rate of 3% with $520 million lent through the International Development Association (IDA).
  • The funds are intended to help the economy recover from the effects of the Covid-19 pandemic by strengthening fiscal management.

Kenya has received a $750 million (85.8 billion shillings) loan from the World Bank to support its budget and carry out tax, energy, water and land reforms even as Eurobond costs double .

The loan is the second tranche given to the country after the World Bank wired a similar amount in June last year under the Development Policy Operation (DPO) program, which lends money for budget support instead finance specific projects.

The World Bank said the concessional loan will have an annual interest rate of 3% with $520 million lent through the International Development Association (IDA), having a maturity of 30 years with a grace period of five-year pardon and $230 million through the International Bank for Reconstruction. and Development (IBRD) with a maturity of 18.5 years and a grace period of five years.

The funds are intended to help the economy recover from the effects of the Covid-19 pandemic by strengthening fiscal management, boosting the efficiency of the electricity sector and carrying out environmental, land, water and health reforms. .

It comes as bond yields, which have a maturity profile between two and 26 years, have risen by an average of 3.34 percentage points since June 2021. The biggest rise has been on seven-year paper maturing in 2027, which nearly doubled from 4.8% to 9.17%.

“This funding is the second in a two-pronged series of development policy operations launching in 2021. Kenya’s DPO total annual interest cost is approximately 3.0%,” said Economist Alex Sienaert. principal for the World Bank in Kenya.

The bank said part of the funds would go towards setting up an electronic procurement system for government goods and services to improve transparency.

Mr. Sienaert said that by the end of 2023, the program aims for five strategically selected ministries, departments and agencies to procure all goods and services through the e-procurement platform.

In energy, Kenya is expected to ensure competitive prices through a transparent and competitive auction system that has the potential to generate savings of around $1.1 billion (125 billion shillings) out of ten years at current exchange rates.

The funds are also expected to help raise taxes, cut spending while preserving space for social spending and reforms to boost income growth.

Already, the risk attributed to Kenya’s sovereign bonds by international investors has risen over the past nine months even before the Fed’s rate announcement, meaning the country would have to pay higher interest if it issues a new Eurobond under current market conditions.

Kenya has agreed with the IMF to stick to concessional financing to reduce debt vulnerabilities that have seen the country move away from syndicated loans and focus solely on multilateral loans and Eurobonds.

Kenya is trying to balance its debt portfolio after a wave of trade debts piled up and became expensive to repay, absorbing more than 63% of tax revenue.

Concessional and semi-concessional borrowing, including from the IMF and other multilateral agencies, is part of the Treasury’s plan to limit reliance on external commercial borrowing in coming years to reduce debt vulnerabilities.

By borrowing from multilateral agencies, the IMF and the World Bank, Kenya has already managed to reduce its dependence on more expensive commercial loans.

Cheaper loans from the World Bank and the International Monetary Fund (IMF) have reduced the average cost of Kenyan loans from 9.1% to 6.9% according to Parliament.

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