On 11 January, the Paris Club announced that Kenya would benefit from the Debt Service Suspension Initiative (DSSI) from 1 January to 30 June 2021. At the start of a crucial year in Kenya’s political cycle, the government’s U-turn on an earlier decision not to participate in the initiative does not bode well for the state of public finances. While Kenya has committed to seeking a similar debt service suspension from its other bilateral official creditors, most notably China, this obligation does not extend to its private creditors. Kenya’s decision to join the scheme after all may raise suspicions regarding the intentions of Nigeria and Ghana, the only large DSSI-eligible economies in the region remaining. However, albeit under intense fiscal pressure, both have substantially less to gain from joining the initiative than Kenya.
As per the timeline below, Kenya is a latecomer to the DSSI, which took off in May 2020 with an initial six-month timeframe and was subsequently extended by another six months through 30 June 2021. As recently as November 2020, the treasury had dismissed local media speculation that it would soon apply for the DSSI despite earlier claims to the contrary. According to a statement of Treasury Secretary Ukur Yatani cited by Bloomberg, today’s arrangement covers KSH 32.9bn (USD 301mn) in debt service owed to 10 Paris Club members. Furthermore, Yatani is quoted as expecting formal approval of another KSH 40.6bn (USD 372mn) in suspended debt service from other G20 members “in [the] coming weeks.” Notably, the extended DSSI does not imply a requirement for private sector participation, which would only kick in should Kenya seek a more comprehensive debt restructuring.
Under the terms of the DSSI, Kenya is obliged “to devote the resources freed by this initiative to increase spending in order to mitigate the health, economic and social impact of the COVID19-crisis.” However, President Uhuru Kenyatta should not find it difficult to justify additional spending on his ‘Big Four’ legacy agenda (food security, affordable housing, manufacturing, and universal healthcare) under this headline. As such, it will serve to boost his popularity ahead of the constitutional referendum on the proposals of the Building Bridges Initiative (BBI) envisaged by mid-year. The U-turn on the DSSI to free up resources to this end underscores our earlier analysis that the political elite’s preoccupation with electioneering provides little incentive to rein in the budget deficit.
Meanwhile, Kenya’s decision to join the DSSI may have partly been encouraged by Cote d’Ivoire’s successful sale of a EUR 1bn (USD 1.23bn) Eurobond in November 2020. Amid high investor demand and a final coupon of 4.8%, the issue may have dispelled persistent concerns that accession to the DSSI would preclude countries from accessing financial markets at affordable rates. However, as per the chart below, Nigeria’s and Ghana’s outstanding bilateral debt is less than half that of Kenya, considerably narrowing both countries’ incentive to apply. Furthermore, Ghana plans to issue up to USD 5bn in external debt in Q1 and will be eager not to upset the market before then.