Kenya’s external debt up Sh351bn on weak shilling

A man with a bundle of dollar bills

A man with a bundle of dollar bills. 

Photo credit: Shutterstock

 The weakening of the shilling has raised Kenya’s foreign currency debts by at least Sh350.6 billion since the beginning of the year as the local currency yesterday stayed at a historic low of Sh132.52 against the greenback.

By end of December 2022, Kenya’s public debt hit Sh9.17 trillion, out of which Sh4.7 trillion (51.2 per cent) constituted external public debt.

Of the Sh4.7 trillion external debts by the start of January, dollar-denominated loans totalled Sh3.19 trillion or 68.06 per cent, Sh928.9 billion in Euro (19.79 per cent), Sh252.9 billion in Chinese yuan (5.38 per cent), and Sh198.38 billion in Japanese yen (4.22 per cent). However, a straight three months of steep depreciation of the Kenyan shilling will see the country spend more to service the debts when the government purchases the respective currencies to pay back its creditors.

A weak local currency means Kenya requires more shillings to pay back the same amount of debt, translating to higher foreign loan repayment costs. A Nation analysis shows the shilling has depreciated 7.37 per cent against the dollar, 9.6 per cent against the Euro, 7.2 per cent against the yuan and 4.2 per cent against the yen.

With the 7.37 per cent depreciation against the US dollar, the analysis shows that, working with the December external debt as the baseline, the shilling’s depreciation added at least Sh235.8 billion on the dollar-denominated debt stock by April 3, 2023, when the shilling exchanged at 132.52 units against the greenback. This would put the greenback-denominated debt stock at Sh3.4 trillion, without considering any further borrowing. The analysis also shows that the Euro-denominated debt, which was Sh928.9 billion (19.76 per cent) of the total external debt by end of December 2022, has ballooned to cross the Sh1 trillion mark.

The exchange rate on January 3, 2023, was 131.65 units against the Euro, which increased to 144.29 units by April 3, to see the Euro-denominated debt stand at Sh1.018 trillion. This has been the trend with other currencies that constitute over 97 per cent of Kenya’s external public debts.

The yuan-denominated debt by end of December, for instance, was Sh252.9 billion (5.38 per cent of total external debt then) and after a 7.2 per cent depreciation of the shilling against the Chinese currency from at 17.93 units by the start of January to 19.23 units by April 3, the debt has risen to Sh271 billion.

The same is the case with the yen-denominated debt, standing at Sh198 billion by end of December (4.22 per cent of total external debt then). The yen-denominated debt crossed the Sh206 billion mark to see the total added cost on the external public debt stand at Sh351.59 billion.

This means that the external debts denominated in the four major currencies have moved from Sh4.58 trillion by the start of the year to Sh4.93 trillion by April 3.

“Kenya’s public and publicly guaranteed external debt is denominated in various currencies to mitigate against currency risk. The dominant currencies include the US dollar and the Euro, which accounted for 87.8 per cent of the total currency composition at the end of the second quarter of 2022/23,” says the Central Bank of Kenya (CBK) in its October-December 2022 quarterly economic review.

During the same period, Controller of Budget Margaret Nyakang’o reported that she approved over Sh3 billion in the six months to December 2022 to top up debt payments, solely caused by the weak shilling.

Ms Nyakang’o noted that the depreciation of the shilling was increasing debt-related risks, indicating that “there is, therefore, a risk of an increase in the local value of the stock of external debt with the depreciation of Kenya shilling against the US dollar.”

While the COB report only focused on the dollar-denominated debt, a look at all the major foreign currencies shows that the burden is growing fast and widely and could gross Sh1 trillion annually if the shilling does not hold steadily.

The continued weakening of the shilling also means that the burden will grow beyond the figures covered by this analysis.