The cooperation with the IMF towards implementing a key policy change to bring down its unsustainable debt profile is a contrast between Kenya’s economic reform story and what has played out in another major economy on the continent – Nigeria.”
Kenya’s impasse with the International Monetary Fund on public debt disclosure came to an end this week after the East African country bowed to pressure to include Sh3.4 trillion ($30.8 billion) in parastatals, private-public partnerships (PPPs), pensions, and county foreign currency loans as part of its national debt. The decision not to had hitherto given a more flattering picture of the debt burden of East Africa’s biggest economy.
Like many countries in the developing world, Covid-19 has exposed Kenya’s debt vulnerabilities as it faces ballooning budget deficits worsened by the crisis. The government has taken a number of steps to address its particularly high and costly debt pile-up including shunning expensive commercial loans to reduce growing repayments at a time when revenue collection has been squeezed by the pandemic.
Nairobi, which deferred about $690 million in debt payments, also joined the G20 Debt Service Suspension Initiative – a programme aimed at helping poor countries weather the pandemic (under which it has secured debt-servicing suspension from January to the end of June from the Paris Club of international creditors) as well as turn to the IMF for a $2.3 billion loan to help with its Covid-19 response and a strong multi-year effort to stabilise and reduce debt levels.
The Fund has been pushing for Kenya to expand its national debt coverage to include all loans of state-linked firms, as part of key reform demands that usually underpin a World Bank or IMF-supported programme. Kenya’s Treasury only previously acknowledged guaranteed debts with authorities reluctant to take up liabilities incurred by counties (local governments) or government parastatals as public debt, allowing more room for borrowing.
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Now, Kenya’s national debt will rise by Sh3.4 trillion – in addition to the Sh7 trillion ($63.6 billion) on Treasury record – thereby crashing through the Sh9 trillion ($82 billion) ceiling set by Parliament.
“Authorities noted the importance of expanding debt coverage to include counties, non-guaranteed debt contracted by the extra-budgetary units, and State-owned Enterprises (SOEs),” the IMF said in a review on the country’s debt. “They planned to take a gradual approach towards monitoring contingent liabilities, for example, starting with external borrowing by large SOEs.”
The cooperation with the international lender towards implementing a key policy change to bring down its unsustainable debt profile is a contrast between Kenya’s economic reform story and what has played out in another major economy on the continent – Nigeria.
Nigeria has resisted meddlesome IMF
World Bank and IMF loans are contingent upon reforms, which can range from the unification of exchange rates, removal of subsidies on petroleum, to the restructuring of the entire civil service. Usually, there are short-term pains to be endured (like loss of jobs for thousands of public workers) and long-term gains to be derived from such reform programmes.
The Nigerian government, grappling with the historic plunge in oil prices and crumbling finances, last year sought a $1.5 billion loan package (in budgetary support) from the World Bank. Three key reforms were demanded in return, two of which were supposedly implemented.
In April 2020, Nigeria announced the removal of the fuel subsidy and also moved to allow market-determined electricity tariffs as part of the effort to qualify for the loan. But approval has been delayed for months due to concerns over its reluctance to fully embrace foreign exchange rate reforms, particularly the adoption of a unified, more flexible exchange rate.
The CBN, even till now, has continued to impose controls that impede the evolution of a market-determined and stable foreign exchange rate even as Nigeria tries to convince the World Bank it would meet conditions for the $1.5 billion loan application.
Nigeria’s dubious subsidy removal
Many countries have to borrow from the IMF because they have refused to adopt prudent policies because of strong domestic constituencies that favour unsustainable policies (such as fuel subsidy and high exchange rates) and are often very reluctant reformers while seeking and even after signing up to IMF programmes.
But Africa’s biggest economy, Nigeria, has proved to be a peculiarly reluctant client and implemented mostly half-hearted reforms – as demonstrated in recent reports that the country may have returned to the era of petrol subsidy payment.
A “full deregulation” of the downstream sector of the oil industry that culminated in the removal of petrol subsidy was announced early 2020 after a sharp drop in revenue caused by the Covid-triggered energy market crash. The low oil prices also meant reduced costs of importing premium motor spirit (petrol) and thus the end consumer would pay less, meaning Nigerians would feel a less inflationary impact from the subsidy removal.
But following the recovery in crude oil prices, which are currently trading at their highest levels since February 2020 (Brent oil futures was at $57.34 as of Wednesday morning), the landing cost of petrol has also risen from N143.60 per litre in December to N158.53 per litre. Additional costs in throughput, wholesaler’s margin, storage, administration, transportation, bridging, and retailers’ margin bring price at the pump to about N181.69 per litre but petrol in Nigeria is presently sold at between N161-N163 per litre, leaving a difference of N18 per litre, according to an analysis by Punch.
Finance minister Zainab Ahmed on Wednesday insisted that the government will go ahead with its policy on the removal of subsidy on petrol and electricity, with no provision made in the 2021 budget for their subsidies. However, state-run Nigerian National Petroleum Corporation (NNPC) has historically termed previous differentials as under-recovery and absorbed them as part of its cost of operation.
With there still no specific plan for petrol subsidy removal, that seems to be the route the Nigerian government will continuously take as regards the deregulation of the petroleum industry and subsidy removal, which only further demonstrates its reluctance to commit to reforms and keeps the sector lingering in policy uncertainty.
