Kenya Approaches $1.5 Billion Loan Agreement with UAE

Kenya is close to securing a $1.5 billion loan from the UAE to address its budget gap and rising debt costs. Reports indicate an agreement is imminent with an interest rate of 8.2%. The country is facing significant financial challenges, including a projected fiscal deficit of 4.7% of GDP and rising debt-to-GDP ratio, which reached nearly 72% in 2023. Kenya has been enhancing ties with the UAE to bolster its economic position.

Kenya is nearing an agreement with the government of the United Arab Emirates (UAE) for a loan of $1.5 billion, a strategic move aimed at strengthening the country’s financial position in light of escalating debt costs. As reported by Bloomberg on Wednesday, Kenya is in discussions with the UAE capital to secure this loan, which is intended to address the existing budget-financing gap. Reports suggest that the agreement is on the verge of completion, with an anticipated interest rate of 8.2% on the new funds. A source familiar with the negotiations stated, “[The] deal is as good as done.” Despite these efforts, Kenya is grappling with significant challenges related to domestic debt burdens, widespread social unrest, and escalating political instability. These issues have arisen amidst planned tax hikes and increasing demands for governmental reforms. According to Fitch Ratings, the country’s fiscal deficit is projected to expand to 4.7% of GDP for the financial year concluding in June 2025, surpassing the government’s current deficit plan. This widening deficit can be attributed to the retraction of proposed revenue measures, increased debt servicing requirements, and elevated social expenditure amidst civil pressures. The Kenyan government’s debt-to-GDP ratio reached approximately 72% in 2023, an increase from 67% the previous year, largely influenced by the depreciation of the local currency. It is, however, expected to experience a slight decrease to 65.6% by 2026. The external debt service is projected to lessen to $4.4 billion in FY25 from $5.4 billion in FY24. In recent years, Kenya has been enhancing its strategic partnership with the UAE. Notably, last year, the two nations extended an oil supply deal that allows key UAE firms, such as the Abu Dhabi National Oil Company and Emirates National Oil Company, to supply oil to Kenya under more favorable credit terms, moving away from a previously utilized open tender system. Additionally, early this year, Kenya and the UAE signed a memorandum of understanding to enhance governance and institutional capabilities between the two countries.

The backdrop of this negotiation centers around Kenya’s increasing struggles with its national debt and fiscal management. Rising costs of debt servicing and a deteriorating economic landscape have prompted the Kenyan government to seek external financing to stabilize its finances. The relationship between Kenya and the UAE has been bolstered by bilateral agreements that facilitate trade, including oil supply contracts, aiming to mitigate financial pressures at a national level. This loan discussion reflects a broader strategy for the Kenyan government to address pressing economic hurdles while fostering international partnerships for future resilience and stability.

In summary, Kenya is on the cusp of formalizing a $1.5 billion loan from the UAE, a critical step in addressing its budget-financing gap amid soaring domestic debt and societal tensions. The anticipated agreement, accompanied by an interest rate of 8.2%, underscores the gravity of the country’s economic situation. The fiscal deficit is projected to widen, reflecting the challenges Kenya faces with rising debt and political pressures. Strengthening ties with the UAE through favorable trade arrangements represents a concerted effort by Kenya to navigate its economic difficulties and achieve greater financial stability moving forward.

Original Source: www.zawya.com