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Impact of early debt repayment on Kenya’s economy

Joshua Otieno by Joshua Otieno
December 29, 2023
in News
Reading Time: 2 mins read
Debt

[Photo/ Courtesy]

President William Ruto disclosed the government’s initial plan to repay USD 300 million of the 10-year Eurobond in December as an early repayment in a parliamentary address on November 9.

However, the National Treasury, through a statement, has indicated a shift from this plan, opting instead for coupon payments totaling KES 10.8 billion.

While the initial inclination towards early buyback reflected fiscal responsibility and prudent debt management, experts raised concerns.

One primary concern is the opportunity cost, as allocating a significant portion of financial resources to early Eurobond repayment might mean foregoing potential high-return investment opportunities.

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This is akin to personal finance principles, emphasizing the importance of utilizing funds to generate income rather than hastily repaying debts.

The decision’s impact on credit rating was also debated. While early debt repayment signals commitment to meeting obligations, investors could interpret it as a sign of financial stress and a lack of confidence in the local economy. This perception might lead to a credit rating downgrade and increased borrowing costs.

Premature settlement exposes the government to unnecessary foreign exchange risks, especially considering the Kenyan shilling’s recent depreciation against the dollar. Stabilizing the currency before repayment through increased productivity and attracting foreign investments would be a more strategic approach.

Additionally, early repayment could lead to fiscal inflexibility, limiting the government’s ability to respond to unforeseen economic challenges promptly. This constraint on financial resources may compromise the nation’s financial resilience, particularly in handling emergent issues such as the challenges posed by heavy rains.

Crucially, early repayment would eliminate the opportunity for refinancing, a strategic move for potentially securing more favorable terms. By committing to premature repayment, the government would miss the chance to explore options like lower interest rates, extended repayment periods, or improved overall debt terms through refinancing.

This decision withdrawal or delay is thus welcomed, allowing for a comprehensive evaluation of alternative avenues and suggesting a more consultative decision-making process by the government.

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