Debt Relief Amidst the COVID-19 Pandemic

In the wake of the Coronavirus pandemic, the economic effects of the virus continue to increase with the number of cases rising and the number of deaths escalating. As such, there are risks abound on revenue collection and increased expenditure resulting from capital required to control the pandemic leading to increased fiscal pressure given the existing huge fiscal deficit. Therefore, we look at debt relief as an option available to the government in mitigating the effects of the pandemic on debt sustainability.

One of the key elements of debt sustainability in any economy is the ability to service debt, and this is usually measured by revenue collection to total outstanding payments required, both in principal and interest payments. The pandemic has so far had a negative impact on revenue collection and borrowing costs and the situation is expected to worsen as highlighted below:

1. Revenue Collection: Revenue collection activities of the government have been affected due to the ongoing pandemic with major economic sectors such as tourism, manufacturing, and agriculture feeling the brunt effects of the pandemic following supply-side shocks, the decline in export demand and reduction of tourism and remittance flows,
2. Expenditure: The government’s expenditure is expected to increase to an estimated Kshs 2.8 tn according to the 2020 Supplementary II budget estimates, from Kshs 2.7 tn in the FY’2019/2020 budget, following additional spending to strengthen the health care system to withstand a potential spike in COVID-19 infections, and,
3. Increased Borrowing Costs: Kenya’s foreign debt is mostly denominated in foreign currency therefore the volatility of the exchange rate plays a key role in determining our borrowing costs.

The public debt in the country is a point of concern with the debt to GDP ratio estimated at 62.0% exceeding the IMF’s recommended threshold of 50.0%, as well as the debt service to revenue ratio at 46.1% having exceeded the 30.0% threshold. The trend is worrisome as the economy is likely to face fiscal challenges arising from the global pandemic. This has been echoed by various authoritative bodies, with indications currently pointing to a possible further downgrading of Kenya’s creditworthiness currently at ‘B+’ by the global rating firm Fitch. In comparison to the size of the stimulus packages for developed countries, the total amount received from debt relief is minuscule. However, it could provide an important fiscal breathing space and to offset to a certain degree the loss incurred by contracting export revenue and decline in other financial inflows. Factoring the current debt levels and the risks abound in the medium term, we are of the view that in light of the ongoing pandemic and global recession looming, for the government to reduce our debt levels, in line with the IMF sustainable levels, it should consider;

1. Negotiating for a temporary debt standstill. Kenya could save approximately Kshs 84.3 bn in debt servicing to China and with precedence already existing on debt standstill, following G-20 nations agreeing to postpone some of Africa’s debt, the standstill would be a realistic and immediate approach,
2. Paris Club activities in seeking debt relief to avoid sinking into a debt trap. The government should approach the Paris Club to seek relief from Japan since they are the second-largest lenders to the country. Because of the shocks caused by the crisis, MDRI and HIPC Initiative might not be adequate to sustain the impact, therefore the government needs to take a multi-pronged approach to tackle the challenges of developing countries while taking into consideration the challenges posed toward maintaining debt sustainability, in view of the building up of pressure on debt servicing,
3. Accessing IMF emergency financing and raise IMF special drawing rights to provide additional liquidity and serve as a bridge special purpose vehicle for commercial debt servicing, and,
4. Debt swaps for sustainable development since they offer a win-win situation through reduction of debt and development spending increased,  while creditors benefit  from  an increase in  the value  of  remaining debt claims.