Kenya: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
19 Apr 2002
eISBN:
9781451821062
Language:
English
Keywords:
ISCR; CR; Kenya; inflation rate; CPI; price; bank; NPV of debt; government of Kenya; factor cost; Kenya's debt; access to concessional financing; Agricultural commodities; Exports; Imports; Debt service; Transportation; Middle East; Western Europe; Eastern Europe; Africa; Asia and Pacific
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This Selected Issues paper and Statistical Appendix addresses the question of how to interpret recent developments in the Kenyan consumer price index (CPI) properly to assess the current inflation pressure and extract signals about possible future CPI inflation trends. The paper discusses why Kenya’s exports have performed poorly over the past five years in spite of a more liberalized trade and exchange rate regime. The analysis shows that Kenya faces both price and nonprice constraints on export performance.

Abstract

This Selected Issues paper and Statistical Appendix addresses the question of how to interpret recent developments in the Kenyan consumer price index (CPI) properly to assess the current inflation pressure and extract signals about possible future CPI inflation trends. The paper discusses why Kenya’s exports have performed poorly over the past five years in spite of a more liberalized trade and exchange rate regime. The analysis shows that Kenya faces both price and nonprice constraints on export performance.

VIII. External Vulnerability Analysis81

A. Introduction

194. This section describes Kenya’s external vulnerabilities, particularly those relating to its external debt. The purpose of this exercise is to examine the composition and evolution of Kenya’s external debt under two scenarios: a high-case scenario wherein GDP and export growth are robust throughout the projection period and the IMF- and IDA-supported program remains on track; and a low-case scenario wherein reforms are not implemented, the program is not brought back on track, and Kenya’s situation deteriorates. The results show that Kenya’s ability to withstand an external shock are vastly improved under conditions of strong economic growth and macroeconomic stability, while the country’s vulnerability to external shocks82 is worsened in a situation of stagnant growth.

195. The data used in this section were provided by the Kenyan authorities and have been augmented by staff estimates. This exercise is based on aggregate external debt data (rather than loan-by-loan data) comprising broad categories of debt.83 These data, including many of the assumptions in the exercise, have been discussed with the authorities. In addition, the results of an earlier version of this exercise were presented to the authorities in October.84 The remainder of this section is organized as follows: the level and composition of external debt at end-2000 are discussed in subsection B, an analysis of Kenya’s external vulnerability is provided in subsection C, and a conclusion follows.

B. Level and Composition of External Debt at End-2000

196. At end-2000, Kenya’s external debt, including arrears, stood at US$5.3 billion, or 51 percent of GDP (Table 23). The net present value (NPV)85 of this debt is estimated to have been US$3.9 billion, equivalent to about 38 percent of GDP and 143 percent of exports.86 Arrears at end-2000 amounted to US$60 million, representing mainly reschedulable arrears to commercial creditors. Kenya’s high domestic debt burden and its potential consequences for fiscal sustainability and vulnerability are discussed in Section VII.

Table 23.

Kenya: Nominal Stock and Net Present Value of Debt at End-2000

(In millions of U.S. dollars)

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Sources: Kenyan authorities; and Fund staff estimates.

Figures for Kenya’s NPV of debt vis-a-vis the Paris Club are affected by the current low CIRR for Japanese yen-denominated debt.

197. Multilateral creditors held about 57 percent of Kenya’s debt at end-2000, while bilateral creditors accounted for 36 percent (Figure 19). In NPV terms, the multilaterals’ share was 42 percent, while the bilaterals’ share was 48 percent. Commercial creditors constituted 7 percent of Kenya’s debt in nominal terms, and 10 percent in NPV terms. The difference in shares between nominal stock and the NPV of debt is due to the relative degree of concessionality provided by each creditor group and the commercial interest reference rates (CIRRs) for certain currencies.87

Figure 19.
Figure 19.

Kenya: Composition of External Debt at End-2000

(In percent)

Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A008

Sources: Kenyan authorities; and Fund staff estimates.1/African Development Bank/African Development Fund.

198. With only a brief history of debt restructuring, Kenya has generally serviced its debts to all creditors. In 1994, Kenya had its first rescheduling under the auspices of the Paris Club. The country was granted a rescheduling on nonconcessional terms by the Club, and made the final payment of this agreement in September 2001. In 1998, Kenya rescheduled a portion of its commercial debt with the London Club. The agreement provided for cancellation of US$21 million of arrears and rescheduling of US$49 million. In 1999 and 2000, Kenya accumulated arrears on official bilateral and commercial debt largely because of payment difficulties caused by the adverse effects of a prolonged drought on the economy. In November 2000, the Paris Club agreed to reschedule about US$300 million of Kenya’s debt on nonconcessional terms.88 Kenya is still pursuing comparable treatment from the London Club for this rescheduling.

C. External Vulnerability Analysis

199. The analysis presented in this section examines the evolution of Kenya’s debt under two scenarios—a high-case scenario underpinned by strong macroeconomic performance and a low-case scenario in which the economy stagnates. To examine Kenya’s vulnerability to external shocks in the low-case scenario, the effects of a one-off terms of trade shock on the various debt indicators are examined. The macroeconomic assumptions for both the high-case and low-case scenarios are presented in Table 24.

Table 24.

Kenya: Macroeconomic Assumptions, 2000–15

(Percent change from previous year, unless otherwise indicated)

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Sources: Kenyan authorities; and Fund staff estimates and projections.

Includes defense-related imports, imports of maize, sugar, and airplanes, and imports related to rehabilitation of the energy sector. Special imports decline in 2005, causing total import growth to fall in that year.

Assumptions

200. The high-case scenario assumes that the IMF- and IDA-supported program is brought back on track by mid-2002 and that real GDP and export growth are robust throughout the projection period. Macroeconomic conditions remain stable, with average consumer price inflation hovering around 5 percent per year. Average GDP growth over the period 2002–15 is roughly 4.6 percent while export (goods) volume growth is 5.9 percent. As the economy recovers, gross reserves continue to increase, rising to 4.8 months of import cover by end-2015, from 3.6 months of import cover at end-2001. The terms of trade are assumed to remain roughly constant, while the current account deficit continues to be sizeable, owing to high investment-related import demand. Foreign direct investment (FDI) is assumed to increase rapidly, although by 2015 it reaches only 2 percent of GDP.89 Underpinning this scenario is an assumption that structural adjustment is pursued vigorously. The balance of payments financing gaps are assumed to be filled by concessional loans and grants (Table 25)90

Table 25.

Kenya: Balance of Payments in the High-Case Scenario, 2000–15

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Kenyan authontics: and Fund staff estimates and projections.

Includes underrecorded tourism earnings.

201. The low-case scenario presents a situation in which the program is not brought back on track throughout the projection period and the Kenyan economy plunges into a vicious cycle of high inflation, a depreciating nominal exchange rate, low growth, and overall stagnation. Real GDP growth averages a mere 1.1 percent over the period 2002–15, while inflation accelerates to an average of 20.5 percent over the same period. The lack of foreign financing, along with sluggish growth, causes gross official reserves to fall from 3.6 months of import cover at end-2001 to 2.3 months of import cover by end-2015. In addition, it is assumed that the modest financing gaps remaining are covered by borrowing on nonconcessional terms (Table 26).91

Table 26.

Kenya: Balance of Payments in the Low-Case Scenario, 2000–15

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Kenyan authorities; and Fund staff estimates and projections.

Includes underrecorded tourism earnings.

Impact on debt ratios in the high-case scenario

202. The results show a vast improvement in Kenya’s external debt ratios in the high-case scenario, suggesting that the country’s vulnerability to external shocks will be reduced over the medium and longer term. As noted above, this scenario assumes that the relatively moderate financing gaps will be filled by concessional loans and grants. As this is a scenario in which the IMF- and IDA-supported program is implemented, it is likely that support from the IMF, as well as IDA, will catalyze additional resources from other sources.

203. The nominal stock of debt in the high-case scenario increases over the projection period from about US$5.3 billion at end-2000 to US$6.7 billion at end-2015. This increase, however, is accompanied by a decline in the nominal stock of debt-to-GDP ratio from 51 percent at end-2000 to about 24 percent at end-2015. Both the NPV of debt and debt service are projected to fall over the period 2000–2005. This is due to several factors, including (i) the tailing off, by 2002, of a “hump” in debt service as a result of large payments due to commercial creditors and the Paris Club; (ii) the assumption that new loans are contracted on concessional terms; and (iii) the moderate amounts of new debt that are contracted. The NPV of debt falls from US$3.9 billion at end-2000 to below US$3.7 billion during 2002–05, before rising again to US$4.1 billion by end-2015. Projected debt service falls to a low of US$335 million in 2005 from US$511 million in 2000, before rising to US$384 million in 2015 (Table 27).

Table 27.

Kenya: Debt Dynamics and Debt Indicators in the High-Case Scenario, 2000–15 1/

(In millions of US dollars, unless otherwise indicated)

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Sources: Kenyan authorities; and Fund staff estimates and projections.

Includes the effects of the November 2000 rescheduling agreement with the Paris Club on Houston terms.

Including arrears.

Excluding arrears.

Using three year backward looking average of exports.

As a percentage of current year exports.

204. In determining whether a country is likely to run into solvency or liquidity problems, it is useful to examine two indicators92—the NPV of debt-to-exports ratio93 and the debt-service ratio. For open economies,94 it is also important to track developments in the NPV of debt-to-fiscal revenue ratio and the debt service-to-fiscal revenue ratio as the high export base for these economies could lead to a low NPV of debt-to-exports ratio, potentially masking the fiscal debt burden. In the high-case scenario, all four of these ratios improve over the projection period (Figures 20-22). The ratios of the NPV of debt to exports and to fiscal revenue fall from 143 percent and 162 percent in 2000 to 60 percent and 61 percent by 2015, respectively. Similarly, the liquidity ratios (ratios of debt service to exports and to fiscal revenue) fall from 21 and 23 percent, respectively, to 6 percent (for both ratios) over the same period.

Figure 20.
Figure 20.

Kenya: Ratio of Net Present Value of Debt to Exports, 2000–15

(In percent)

Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A008

Figure 21.
Figure 21.

Kenya: Ratio of Debt Service to Exports, 2000–15

(In percent)

Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A008

Figure 22.
Figure 22.

Kenya: Ratio of Debt Service to Fiscal Revenue, 2000–15

(In percent)

Citation: IMF Staff Country Reports 2002, 084; 10.5089/9781451821062.002.A008

Source: Kenyan authorities and Fund staff estimates.

205. The trends in these ratios indicate that, under a scenario of robust growth and a stable macroeconomic environment, Kenya’s vulnerability to an external shock will lessen over the medium and longer terms. The results of this scenario also point to the need to quickly bring the IMF- and IDA-supported program back on track and pursue the necessary reforms without delay and with a sustained effort.

Impact on debt ratios in the low-case scenario

206. The low-case scenario presents a situation in which little or no adjustment is made and foreign (program) financing dries up.95 In order to maintain some order of stability and stem the decline in reserves, it is assumed that gross official reserves decline somewhat, but that the government also borrows nonconcessionally to fill the remaining external financing gaps. The same debt indicators as in the high-case scenario are presented, and then compared with the results in the high-case scenario (Figures 20-22). In addition, and in order to better examine Kenya’s vulnerability to external shocks in the low-case scenario, a one-off terms of trade shock is assumed as a “subscenario.”

207. As in the high-case scenario, the nominal stock of debt increases over the projection period, but not by as much. The smaller nominal stock is a result of less external borrowing, as a large portion of foreign financing is not available. As a percentage of GDP, the nominal stock of debt falls from 51 percent in 2000 to just under 40 percent in 2015. As in the high-case scenario, the NPV of debt falls in the early years, before rising in the outer years. By 2015, the NPV of debt in the low-case scenario is larger than that in the high-case scenario. This is due to the relative degree of concessionality assumed in the two scenarios.

208. The key liquidity and solvency ratios still improve, although much more slowly than in the high-case scenario. The ratios of the NPV of debt to exports and to fiscal revenue fall from 143 percent and 162 percent in 2000 to 100 percent and 111 percent in 2015, respectively. Similarly, the ratios of debt service to exports and to fiscal revenue also fall to 12 percent and 13 percent in 2015, respectively. As a percentage of gross official reserves, debt service remains relatively high (although it does decline) at nearly 50 percent of gross reserves by 2015. These results imply that Kenya would be more vulnerable to an external shock in the low-case scenario.

209. To test the impact of an external shock in this scenario, it is assumed that a one-off terms of trade shock occurs in 2008. The terms of trade are assumed to deteriorate by 4.4 percent in this year,96 and return to the previous path in 2009. Additional financing gaps are assumed to be filled by new nonconcessional loans. The results of this simulation are presented in Table 28 and Figures 20-22. As expected, the four key ratios would deteriorate if a terms of trade shock occurred relative to both the low-case scenario and the high-case scenario. The ratio of the NPV of debt to exports falls until 2009, and then rises to 131 percent by 2015. The ratio of the NPV of debt to fiscal revenue follows a similar pattern, rising to 141 percent by 2015. The debt-service ratios (to both exports and fiscal revenue) fall throughout the early years before rising to almost 20 percent in 2015. Finally, the ratio of debt service to gross official reserves climbs to nearly 70 percent in 2015, a level higher than that in 2000. The results of this scenario show that Kenya’s ability to withstand even a moderate terms of trade shock would be vastly diminished under conditions of low growth and economic stagnation.

Table 28.

Kenya: Debt Dynamics and Debt Indicators in the Low-Case Scenario. 2000–15 1/

(In millions of US dollars, unless otherwise indicated)

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Sources: Kenyan authorities and Fund staff estimates.

Includes the effects of the November 2000 rescheduling agreement with the Paris Club on Houston terms.

Including arrears

Excluding arrears

Using three year backward looking average of exports.

Debt service as a percentage of current year exports.