Why Kenya supports new calls from UN agencies for debt service relief
Kenya has welcomed a new push by African finance ministers backed by the United Nations Economic Commission for Africa (ECA) for rich countries to extend debt service relief to countries in the region to help their economies to recover from the Covid-19 pandemic and overcome the impacts of the Ukrainian War.
Echoing pleas from the UN agency and African ministers, Kenya says the calls for debt relief are timely and if heeded would provide “respite” to help Kenya and other African countries to protect regional economies from the fallout caused by the latest war between Russia and Ukraine. crisis.
Debt service obligations could crowd out other essential spending by African governments in response to the economic fallout from the latest crisis, analysts say.
African Ministers’ resolutions after the 54th session of the Conference of African Ministers of Finance, Planning and Economic Development (CoM 2022) renewed calls for improved liquidity and better fiscal space for African countries as as they recover from multiple global crises.
The draft resolutions approved by the Committee of Experts and reviewed by the business daily warn that despite the best national and global efforts, the effects of Covid-19, the war between Russia and Ukraine and worsening climatic conditions are “widening the development finance gap in Africa and increasing debt vulnerabilities from the continent “.
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“[The working group advocates] extend the debt service suspension initiative for two years and waive IMF (International Monetary Fund) surcharges for two to three years.
“Also in terms of emergency financing, the IMF needs to raise the access limits for countries to obtain financing,” ECA Deputy Executive Secretary and Chief Economist Hanan Morsy said in a statement.
The Treasury did not respond to the business daily questions on the new joint appeal from the UN agency and African finance ministers by press time.
The call was, however, backed by the Ministry of Foreign Affairs, which echoed growing concerns that countries in sub-Saharan Africa are facing another severe, exogenous shock with little financial room for maneuver to deal with the debt service obligations.
“We would be more than happy to participate of course,” Foreign PS Macharia Kamau said. business daily. “Kenyans are also under pressure because of global trends.”
The ongoing war between Russia and Ukraine has caused food and fuel prices to spike in Kenya and other African countries, threatening the region’s economic prospects.
Analysts say this latest setback could not have come at a worse time – as growth began to pick up and policymakers began to address the social and economic legacy of the Covid-19 pandemic. 19 and other development challenges.
According to the IMF, the effects of the war will be “deeply consequential, eroding living standards and worsening macroeconomic imbalances”.
Echoing these concerns, UN Under-Secretary-General and ECA Executive Secretary Vera Songwe said the UN agency will work with African governments and institutions to explore “innovative financing options for the recovery of Africa that were proposed during the session”.
But Ms Songwe said in a statement that G20 countries should take further steps to unlock billions of dollars for Africa’s poorest countries and also for developing countries like Kenya to avoid lasting scars. from a protracted funding shortfall caused by the Covid-19 pandemic and emerging shocks from the Ukraine-Russia war.
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Two years ago, rich countries backed an extension of the G20’s Debt Service Suspension Initiative (DSSI), to help developing countries survive the Covid-19 pandemic, which has seen 43 of the 73 potentially eligible countries defer $5 billion in “official sector” debt payments. .
According to ECA’s Dr Morsy, a combination of efforts at the national, continental and global levels is needed to respond to the shocks experienced by Africa as a result of the Covid-19 pandemic as well as the war between Russia and Ukraine.
Dr Morsy noted that the continent has been hit by a trio of food, energy and financial shocks.
“Even before the pandemic, Africa had huge development financing needs. In terms of infrastructure, it is estimated that the continent needed 150 to 170 billion dollars per year. For education, we have a funding gap of $39 billion a year.
Africa also needs 3-5% of its GDP (gross domestic product) to finance climate action. These have been complicated by the pandemic,” she said in a statement.
The call from the UN agency and African ministers came even as the African Development Bank (AfDB) warned this week that Africa was at risk of sliding into stagflation – a cycle of slow growth and high inflation – as it battles the lingering effects of the pandemic and rising fuel and food prices caused by the conflict in Ukraine.
“The deceleration in growth highlights the severity of the impact of the Russian-Ukrainian conflict on the African economy,” the AfDB wrote in its African Economic Outlook 2022.
“If the conflict persists, Africa’s growth is expected to stagnate at around 4% in 2023.”
The AfDB estimates that around 30 million Africans have been pushed into extreme poverty and 22 million lost their jobs in the last year alone due to the pandemic.
Vulnerable populations, especially in urban areas, will bear the brunt of rising prices, the report says, adding that economic disruption from war could push nearly four million more people into extreme poverty this year. and the next.
“In the absence of measures to cushion the impact, this could stoke social tensions across the continent,” the report said.
“But in many African countries, fiscal space remains constrained by the effects of the pandemic.”
The UN has already made proposals to the World Bank and the IMF regarding the mobilization of various debt relief funds and instruments.
Kenya was initially reluctant to ask for debt relief offers from rich countries, but changed its mind in January last year after domestic revenue collection missed the target by 12.4%, or 115.9 billion shillings, in the half year to December 2020 – hurt by the economic fallout from Covid-19.
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Kenya’s economy fell 0.3% in 2020, hit by the economic fallout from Covid-19, compared to 5% growth in 2019.
The pandemic has hit Kenya’s incomes and limited access to commercial loan markets, forcing the country to turn to the World Bank and IMF for direct budget financing.
Kenya previously forecast savings of up to 78.17 billion shillings after signing debt repayment moratoriums with several wealthy countries, lifting pressure on its reduced domestic revenue collection.
The Treasury estimated last year that deferred loan principal repayments would amount to 42.23 billion shillings in the previous financial year ending June 2021, while relief on interest payments would reach 35.94 billion shillings.
China, Kenya’s biggest bilateral lender, accounted for 39% of the deferred debt, which Nairobi secured in January last year. Chinese loans have financed the construction of railway lines, roads and other infrastructure projects in Kenya over the past decade.
The deal between Nairobi and Beijing saw the Exim Bank of China suspend payment of 30.48 billion shillings, or 41.67 per cent of the estimated 73.15 billion shillings it was to secure this financial year ending in June. from last year.
This was preceded by another agreement with the Paris Club which cumulatively rolled over about 32.9 billion shillings on January 11 last year under the Debt Service Suspension Initiative (DSSI) directed by the G20.
Countries that had previously accepted debt relief for Kenya under the DSSI included France, Italy, Japan, Spain, United States, Belgium, Canada, Denmark, Germany and the Republic of Korea.