In December 2018, President Kenyatta sat in the State House lawn, flags fluttering behind, as he smirked at journalists who had dropped the ball in a nationally broadcast interview. “Do you know what Japan’s debt to GDP is?” he posed. “Talk like an economist,” he pursued his prey, hammering their oversight on why they had not checked that facts. “It’s over 100 percent of their GDP.”

The President had this satisfied laughter — the last one — and he proceeded to put the country’s debt question to bed. Debt is not bad he said, it is what you do with it. Japan’s debt is now 279.3 percent of their GDP, the only difference is that 95 percent of this load is owed to the Japanese.

Now Kenya’s debt is only 60 percent of GDP, but most of it is owed to foreigners, and here is where the problem lies.

On April 7, a little incident went unnoticed. The world’s first mobile traded bond M-Akiba, worth Sh150 million ($1.4 million), was paid up to 5,509 subscribers who bought tax-free bonds of between Sh3,000 ($28) and Sh1.13 million at an annual 10 per cent interest since March 2017.

This was Kenya’s shot at becoming Japan, an attempt at funding road construction, railways, bridges, power lines and dams with locally raised money. The failure may not openly be admitted, but this issue had sought to raise Sh4.8 billion and even a second M-Akiba only managed an additional Sh187 million.

According to former Treasury chief Henry Rotich, who had called an informal meeting with journalists to explain why Kenya was ‘overborrowing’, this was his greatest challenge. Kenya’s savings rate was 6.1 percent of GDP in 2018 down from 6.5 in 2017 and an all-time high of 11.7 percent in December 2007.

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But while Kenyans were too poor to mobilise resources, the developed world had printed so much money after the 2008 financial crisis that was hunting for yields outside their own economies, which were offering near-zero or sometimes negative returns.

“The West was overlooking our ability to pay back, and were giving short-term loans to be paid in a bullet form, which started coming due when the rates were going up. African countries were celebrating oversubscribed Eurobonds compared to what we were getting locally, but it was high relative to what they were getting in the West,” said Wahoro Ndoho, chief executive officer of Euclid Capital and a former director at the Public Debt Management Office at the National Treasury.

But as debt piled up and tax revenues stalled and in most cases even falling, enough people started questioning the huge debts, but were quickly dismissed with the promise of petrodollars that in any case would bring enough windfall to pay back. Then came the coronavirus, and what it did was to accelerate this dollar debt crisis because now, there are no taxes, no incomes from oil, minerals, tourists, tea and no diaspora dollars to pay the huge loans.

Egyptian investment firm EFG Hermes Holding estimates that Kenya will incur a net negative impact of $1.2 billion (Sh127bn) to $1.3 billion (Sh138bn) on its external balances in 2020.

“In our assessment, we have factored in (i) a sharp drop in exports, particularly flowers and horticulture to Europe; (ii) a 15 per cent drop in remittances; and (iii) six months of zero tourism revenues before ensuing a very gradual recovery in 4Q20. These losses will be cushioned by substantial savings on the imports bill,” EFG Hermes said.

This crisis has exposed years of bringing on debt by African countries since 2013 that have made debt unsustainable by borrowing heavily in dollar denominations and from private creditors and non-Paris Club governments.

The World Bank says 62.4 percent of Kenya’s debt is split between bilateral official and private creditors. Kenya uses 20 percent of its exports to pay debt — the second highest loan service in Africa after Ethiopia.

The Bretton Woods institution has also raised concern about currency fluctuations that could blow African debts over the roof. The World Bank says countries whose debt is in dollars and those whose local debt are bought by foreigners are especially exposed.

Although local debt may be in shillings, foreigners who buy them may decide to exit the market quickly, change their bonds into dollars, and spark outflows, which further weaken the local currency. By the end of December 2019, Kenya owed Sh3.1 trillion to foreigners who require dollars to pay them off.

According to the World Bank, Kenya needed $675 million for bilateral loans alone and $2.3 billion for all creditors this year.

The Capital Markets Authority shows the foreigners also hold 60 percent of the Sh2.1 trillion stock exchange market. Following the outbreak of the virus these foreigners started selling their stake cashing out in dollars and withdrew Sh11.2 billion ($105.7 million) from the Nairobi Securities Exchange (NSE) in February and March alone.

“No one is earning incomes. We were ill prepared for the lockdown, SMEs are collapsing, commodities are collapsing, tourism has collapsed, and this will lead to collapse in the currency market and stock of debt will balloon and will be unpayable,” Ndoho said.

The Kenyan shilling is already facing the pressure of collapse hitting an all-time low of 107 units against the dollar.

All efforts to stop its decline have proved futile. CBK has spent over Sh89 billion to support the shilling this year dipping dollar reserves from $8.7 billion (Sh930 billion) in January to $7.9 billion (Sh845 billion) in 16, April.

Several market traders told Smart Company that CBK has taken out more than Sh200 billion in excess shilling liquidity from banks since the start of April to ensure the local unit remains stable through what is called open market operations.

It’s not every day that the International Monetary Fund can recommend that African Countries impose controls on dollars so as to maintain some of the currency for imports and debt. Asked if capital controls are viable recommendations, Mr Abebe Selassie, director, African Department, said that in instances where capital outflows could indeed, engender imbalances, or exacerbate the crisis, there could be scope for capital controls.

“But the first thing I would stress is that sound macroeconomic policies are the best way, really, to forestall a crisis. If macroeconomic policy settings are sufficient, are supportive, and still you’re seeing pressure for capital outflows, it’s only then that you want to be thinking about these kinds of extraordinary measures,” he said.

But with limited reserves, at what point should Kenya trigger such controls and will that fundamentally change the world as we know it?

One way out of this crisis has been to ask for debt freeze, which Kenya and other African States have been pushing, with Rwanda even asking for a two-year moratorium. President Kenyatta said a resolution was reached during a virtual meeting of the bureau of African Union Heads of State and Government to ask for a debt waiver.

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“As part of efforts to mitigate against the adverse effects of the global coronavirus pandemic, African governments will unite in pushing for debt waivers,” President Kenyatta said on the official State House Twitter handle. Only the Paris Club of lenders have agreed to offer a debt moratorium, saving up to Sh72 billion of bilateral debt with commercial creditors silent on whether they will let Africans of the hook even briefly.

Another option would be for governments to go to the IMF and borrow to pay these debts. Kenya has raised a total package of $1.1 billion ($0.35 billion from the IMF and $0.8 billion from the World Bank) and expect an additional $1 billion from both institutions (after the IMF had doubled its lending capacity under the FRI), as well as from the African Development Bank.

However, it is hard to see how IMF will allow this money to be used to pay of Chinese loans, which have grown as fast as Eurobonds over the last few years. Mr Ndoho said this crisis may bring the Western economic model to a head. If creditors insist on making good their claims, African countries will have no option but to offer assets, which include arable land and, which may in turn spark a reckoning for governments with political implications.

A Wall Street Journal report had indicated that Zambia was considering giving China mining assets, including Mopani, as collateral in exchange for deferral or forgiveness of its sizeable debt. The journal also said that $325 million will be needed to upgrade Entebbe Airport and $1.4 billion for a power plant in Karuma dam contain provisions that would force them to be surrendered to Chinese lenders if the governments cannot pay.

“We used to think that taking of Mombasa was just a dream, but now it is not so far-fetched,” Mr Ndoho said. The big question now is whether poor countries’ debt will be waived by the rich or if some of the lenders will resort to taking over strategic assets such as ports or mining sites.