Kenya’s external debt balloons by Sh344bn on weak shilling

The National Treasury building in Nairobi. FILE PHOTO | NMG

Kenya’s external debt has ballooned by a staggering Sh344.4 billion, giving dimension to the impact of a weakening shilling whose exchange rate against the greenback has tanked to a historic low of Sh133.55.

The Central Bank of Kenya (CBK) data shows that total external debt as of January stood at $37.63 billion (Sh4.7 trillion), where the mean exchange rate was 124.4 against the dollar.

This means that at the current exchange rate, the stock of debt has been inflated to Sh5.03 trillion, pushing up the cost of servicing some of Kenya’s foreign loans as they fell due during the review period.

In February the National Treasury paid Sh694 billion for debts, an increase of Sh27 billion in the same period last year, with part of the increase being attributed to the weakening of the Shilling which pushed the cost of servicing foreign loans.

A weak shilling has also pushed up the cost of importing key materials such as fuel, fertiliser, and machinery from the global market, a situation that has been reflected in the local economy through a spike in prices of basic commodities.

In February 2022, both local and foreign creditors were paid Sh667 billion from the exchequer, piling pressure on the country’s flagging tax revenues. The situation has been aggravated by the tightening of liquidity in the local and international financial markets, which makes it difficult for the country to borrow and repay some maturing loans, technically known as refinancing.

Kenya’s latest stock of external debt might have reduced on new loans being contracted or repaid.

The World Bank in a new report has cast doubt on the ability of the country and other sub-Saharan nations to refinance their multi-billion Eurobonds in the coming months following difficulties facing the global debt markets that have triggered a new wave of expensive loans.

Kenya is preparing to retire the Sh264 billion ($2 billion) debut Eurobond whose maturity comes up in June next year.

The country’s stock of foreign loans must have changed in the intervening period with the nation retiring some debt even as it contracted new ones.

For example, in March, the government paid a total of Sh33 billion for the construction of the standard gauge railway, according to figures provided to the Business Daily by the Controller of Budget, Dr Margaret Nyakang’o.

These debt repayments have contributed to a record drop in the country’s foreign exchange reserves (Forex) to Sh860.6 billion ($ 6.446 billion) by the close of business on Thursday last week.

Almost half of the total public debt is in foreign currencies thus exposing the country to forex volatility.

Most of the Kenya’s foreign loans are owed to multilateral institutions such as the World Bank, the International Monetary Fund (IMF) and African Development Bank, with a big chunk of the loans being concessional loans with preferential repayment terms.

With the tightening of the global market, the country has been forced to rely on cheap loans, especially from the World Bank and IMF.

The World Bank is expected to provide a further Sh132.3 billion ($1 billion) to Kenya through its Development Policy Operations, boosting funding to the exchequer.

The National Treasury said the Kenya shilling exchange rate and interest rates are projected to stabilise as inflation declines with the easing of global supply chain disruptions.

“Exchange rate stability will be supported by the recovery in remittances inflow, and tourism as well as the reduced import of capital goods,” said the National Treasury in its 2023 Medium-Term Debt Strategy, which was published on February

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