US embassy cable - 05NAIROBI2471

UNCLAS SECTION 01 OF 02 NAIROBI 002471 
 
SIPDIS 
 
DEPT FOR AF/E, AF/EPS, AF/PD, EB/IFD, EB/ODF 
USAID FOR AFR/EA 
LONDON AND PARIS FOR AFRICA WATCHERS 
TREASURY FOR ANNE ALIKONIS 
 
E.O. 12958:  N/A 
TAGS: EAID, ECON, EFIN, EINV, KE 
SUBJECT:  WHERE KENYA FITS INTO G-8 DEBT RELIEF PROPOSAL 
 
REF:  Nairobi 2320 
 
1.  Summary:  News that the new G-8 debt forgiveness plan 
excludes Kenya as a recipient has been met with public 
dismay.  Complaints about unfairness and concerns about a 
heavy external debt burden appear misplaced, however.  The 
numbers indicate Kenya's existing stock of external debt is 
in fact both moderate and sustainable.  Moreover, Kenya has 
cultivated a solid track record, refusing to be grouped 
among the poorest and most heavily indebted when it 
restructured its Paris Club obligations over a year ago. 
Thus, despite its exclusion from the G-8's debt relief 
initiative, Kenya should benefit from the long-run economic 
value of being recognized as a reliable borrower. End 
Summary. 
 
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KENYA RESPONDS TO G-8 DEBT RELIEF PLAN: WHY NOT US? 
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2.  The realization that the G-8's recently unveiled 
multilateral debt relief program does not include Kenya 
among the initial group of nations receiving debt write- 
offs was met by consternation and anger by some Kenyan 
officials and media commentators.  A front page headline in 
one local daily declared, "Shock as Kenya Denied Debt 
Relief".  The Chairman of the Parliamentary House Finance 
Committee, Mutahi Kagwe, was quoted in the press as saying 
that the plan "appeared to reward countries that have not 
lived up to their commitment of repaying loans to bi- 
lateral and multilateral lenders."  Kagwe also pointed out 
that Kenya has always met its debt obligations but has 
never benefited from relief and likened the principles of 
HIPC as a "miscarriage of justice," a point reiterated in 
various media editorials. 
 
3.  Planning and National Development Minister Peter 
Anyang' Nyong'o was similarly quoted in the press as saying 
Kenya's request to the G-8 for inclusion in the list of 
countries receiving debt write-offs was turned down, which 
he termed "unfortunate and discriminatory."  Still other 
journalists and would-be experts are touching repeatedly on 
Kenya's poverty, painting the country's stock of external 
debt as a staggering, externally imposed burden that is 
diverting scarce resources away from economic development 
and poverty reduction.  In so doing, they often mix apples 
and oranges, adding both Kenya's external and domestic debt 
together to paint a misleading picture of Kenya as being 
heavily indebted. 
 
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A CLOSER LOOK AT KENYA'S NUMBERS 
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4.  More sober analysis of the situation, however, 
indicates these criticisms and concerns are misplaced. 
Kenya is indeed a poor country - its per capita GDP in 2004 
was $481, and 56% of its population lives on a dollar a day 
or less.  But while it was included in the original list of 
41 Heavily Indebted Poor Countries (HIPCs) in the late 
1990s, Kenya is no longer defined as a HIPC, and for good 
reason.  The reality is that Kenya does not fit the HIPC 
profile.  Compared to Tanzania and Uganda, two neighboring 
countries included in the initial tranche of countries to 
receive debt write-offs under the new G-8 initiative, 
Kenya's stock of external debt burden is not "onerous" and 
does not pose a significant drain on the Government of 
Kenya's (GOK) budget.  As noted in the Central Bank of 
Kenya's own assessment, "forecasts for fiscal year 2004/05 
indicate less pressure on external debt service following 
the rescheduling of debt owed to Paris Club creditors." 
The facts about Kenya's external debt include: 
 
-- Kenya's stock of external debt roughly stands at just 
over $5 billion; 
 
-- The GOK allocated close to $400 million, or roughly 10% 
of its total budget for debt servicing on multilateral 
loans in FY04 compared with 14.0% the previous fiscal year; 
 
-- According to IMF and World Bank statistics, Kenya's debt 
service ratio (debt service as a percent of exports) has 
also been trending downward, decreasing from 14% in FY03 
(prior to its Paris Club rescheduling) to 5.0% in FY04.  In 
comparison, Uganda's debt service ratio has actually 
trended up, increasing from 6.3% in FY02 to 7.1% in FY03. 
Tanzania's debt service ratio is expected to decline to 
11.3% in 2004 from 12.9% in 2003 and 14.6% in 2002; 
-- According to the IMF, Kenya's stock of external debt as 
a proportion of gross domestic output has been trending 
downward over the last several years reaching 27% in 2004 
versus 28% in 2003.  This compares to Tanzania and Uganda 
which toil under (external debt/GDP) ratios of about 83% 
and 73% respectively; 
 
-- The net present value of Kenya's stock of external debt 
is roughly 105 percent of exports, well below the HIPC 
threshold of 150 percent; 
 
-- Kenya's portion of external debt that is multilateral is 
hovering above 70%, most of which is highly concessional; 
--Kenya's ability to sustain its current external debt 
burden is enhanced by indications of a better performing 
economy (reftel).  In his June 7 budget speech, Finance 
Minister David Mwiraria noted that Kenya's real GDP growth 
rate recorded a 4.3% increase in 2004 compared to 2.8% in 
2003.  Mwiraria predicts growth of at least 5% in 2005. 
[Note:  Additional analysis of Kenya's 2005-2006 budget to 
be provided septel.  End Note.] 
 
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KENYA: TAKING THE HIGH ROAD ON DEBT RELIEF 
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5.  Putting the numbers aside, the GOK itself has in the 
past taken the high road on debt relief, much to its 
credit.  In fact, Kenya's "Exit Rescheduling" with the 
Paris Club of official bilateral creditors in January, 2004 
was a landmark:  A country technically eligible for a 67% 
write-off under "Naples terms" voluntarily declined to be 
lumped in with "dead beats" (as the markets would call 
them), asking only for a restructuring of its obligations. 
This clear expression of a well-developed "credit culture" 
was hailed at the time as an indicator of Kenya's economic 
maturity. 
 
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COMMENT 
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6.  Kenya should be congratulated, and should be proud of 
itself, for maintaining its commitments to external 
creditors, and for paying down its external debt on a 
timely and consistent basis.  The GOK leadership should 
highlight the fact that Kenya will be rewarded for its 
efforts, perhaps not through the G-8 proposal, but through 
a continued positive assessment of the country's economic 
sovereign risk status in the international financial 
markets. 
 
7.  It is ironic that some Kenyan commentators, without 
correction from informed GOK officials, are fuming that 
Kenya is not being grouped with the world's poorest 
countries - countries that are unable to live up to their 
financial obligations.  We are, to date, disappointed that 
the GOK leadership has not publicly highlighted the long- 
run value of not being considered among the poorest and 
most indebted.  We hope to see a more mature public debate 
on the debt issue from the GOK in the coming weeks, 
including a recognition that Kenya stands to benefit from 
improved investor confidence in the international capital 
markets and consequently from improved foreign direct 
investment. 
ROWE