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Cablegate: Where Kenya Fits Into G-8 Debt Relief Proposal

This record is a partial extract of the original cable. The full text of the original cable is not available.

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.

--------------------------------------------- ------
KENYA RESPONDS TO G-8 DEBT RELIEF PLAN: WHY NOT US?
--------------------------------------------- ------

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.

--------------------------------
A CLOSER LOOK AT KENYA'S NUMBERS
--------------------------------

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.]

------------------------------------------
KENYA: TAKING THE HIGH ROAD ON DEBT RELIEF
------------------------------------------

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.

-------
COMMENT
-------

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

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