Is debt to blame for Kenya’s dollar woes?

In his Madaraka Day speech, President Uhuru Kenyatta defended the debt burden his government has put Kenyans into, saying it has been worthwhile and even advised the next administration not to shy away from debt.

Unfortunately for him, Kenya’s debt bubble is bursting in his face. The most pressing problem currently is the dollar shortage, and it’s linked to heavy government borrowing. When Uhuru’s government came into power, it opted for foreign commercial loans, a path late President Mwai Kibaki avoided because they are expensive.

Today, our debt servicing cost is at its highest and the Central Bank of Kenya has been forced to maintain a big US dollar reserve to facilitate debt servicing and avoid a default.

Now, when this paper run the headline about the dollar shortage the other week, yields of our 2027 Eurobond jumped from eight percent to 12 percent signalling investor risk sentiments.

This was the reason why the Treasury opted not to float the Eurobond as it had planned in May because investors would have benchmarked it with the performance of the 2027 one.

The new Eurobond would have offered a yield of around 10.5 percent and investors wouldn’t have to touch it.

Moving on there has been the argument that Kenya’s battered economy situation is linked to the systemic shocks from the global economy. This is far from the truth because Ivory Coast also has a Eurobond maturing in 2027 and the performance of the two would be similar.

Ivory Coast’s yield is at eight percent while Kenya’s has jumped to 12 percent at some point. Another way to look at it is that Ghana’s yield is around 20 percent yet its economy is in a better status than Kenya’s.

The reason for this is that Ghana is not under the International Monetary Fund (IMF) programme, which provides confidence to investors. So, it’s the IMF deal that has cushioned the Kenyan economy, without it, our yields would be above 20 percent.

This is confirmed by US Treasury Secretary Janet Yellen when she told the US Congress in April that the IMF bailed the Kenyan economy from near collapse.

Dollarisation

Two weeks ago, Pwani Oil put its customers on notice that it will be billing them US dollar invoices. It’s struggling to pay its foreign suppliers for raw materials and has opted for this route to raise dollars to timely pay its suppliers.

We shouldn’t imagine that the rest of the manufacturers will be going this route because the Kenya shilling is about to take heavy losses. Manufacturers billing local customers and not foreign who would be importing the goods means a troubled economy heading into dollarisation.

Businesses are also going for US dollar loans from local banks to be able to get hold of the dollars. Banks are also considering stopping to offer letters of credit because of the limited dollar reserves when at the same time they need reserves to honour greenback transactions and not default on their international bank partners.

A local bank defaulting on a payment to an international bank partner means the bank will be locked out of the international financial system which is death to a bank.

So, we are at a stage where it makes sense for manufacturers to shift operations outside Kenya and simply import the products. But when the Central Bank of Kenya (CBK) governor is asked about the dollar shortage he chooses not to answer the question exposing the recklessly nonchalant regime we have at the helm of CBK.

Central banks all over the world publish minutes of meetings of policy boards, monetary policy reports, inflation reports et al to earn the confidence of businesses, households and financiers apart from guiding expectations.

In Kenya, we have a CBK not bothered to gain public confidence and manage expectations while in a crisis through communication.

In summary, we will need all hands on deck after the election to save the economy. I foresee another handshake coming.

Though the first assignment of the incoming government will be to get rid of the incompetent regime at the CBK.