Kenya shilling’s free fall inflating foreign debt by Sh3bn daily

Kenya’s stock of external debts and the cost of repayment is increasing by Sh3.16 billion every day as the shilling sheds its value against the dollar, giving a fresh perspective to the country’s exposure to foreign exchange volatility.

This is after the country’s stock of external debt rose by Sh382.59 billion in the four months to October 2023 while the debt service burden for these loans surged by Sh6.85 billion — all on the back of the weakening shilling.

The disclosures are contained in the Central Bank of Kenya (CBK) presentation to the National Assembly’s public debt and privatisation committee about the affairs of the Consolidated Fund Service (CFS). 

“In the four months, the stock of external debt and debt service is estimated to have increased by Sh382.6 billion and Sh6.9 billion respectively on account of exchange rate depreciation,” said CBK governor Kamau Thugge in the presentation to lawmakers on Tuesday.

The revelation lays bare the price the taxpayers are paying for the weak shilling, which has between July and October depreciated by 7.2 percent against the dollar. The Kenyan unit has continued to weaken further and opened on Wednesday averaging 151.94 to the dollar.

Since January, the shilling has shed 23.2 percent against the dollar, with the CBK boss recently siding with the International Monetary Fund’s view that the local currency had for long been overvalued by between 20 percent and 25 percent.

Treasury Principal Secretary Chris Kiptoo said on Wednesday in a Kenya Deposit Insurance Corporation forum that in the current financial year, the amount of money that the country has to pay on external debt has increased by nearly Sh150 billion or about one percent of GDP as a result of interest rate and exchange rate movements.

“That [rise in external loans burden] is quite significant. It puts a lot of pressure on the resources that we have,” said Dr Kiptoo.

“Debt is becoming a very big issue. Our debt position is rated high-distress but it is still sustainable. We need to go slow and we are therefore pursuing fiscal consolidation.”

The proportion of external debt denominated in the US currency was at 67.2 percent at the start of July while 21.3 percent, 3.9 percent, 5.1 percent and 2.3 percent was in Euro, Yen, Yuan and Sterling Pound respectively.

Among the currencies that hold most of Kenya’s external debts, the shilling has lost the most against the Pound, having shed 25.8 percent of its value since January.

The shilling has lost 23.6 percent against the Euro in this period and 17.6 percent and 8.5 percent against the Chinese Yuan and Japanese Yen respectively, adding to the country’s elevated pain in servicing foreign currency-denominated loans.

Dr Thugge told the lawmakers that in comparison to the previous financial year, CFS expenditures are projected to increase by Sh525.9 billion to Sh2.078 trillion or 12.9 percent of gross domestic product (GDP), partly on the weakening shilling.

“The foreign interest payments are projected to almost double on increased external debt uptake and depreciation of the Kenya shilling against major international currencies,” said Dr Thugge.

The CFS expenditures are expected to continue exerting pressure on the budget since the debt service consumes half of total revenue with interest payments alone taking 30 percent of the revenue in the financial year 2022/2023, according to Dr Thugge.

Debt repayment is the main expenditure item under the CFS, which is also used to pay for pensions and some salaries for constitutional offices.

The continuing weakening of the shilling and the rising interest rates amid sustained spending pressures could wreak the government’s plan of achieving a 5.4 percent budget deficit in the current financial year and trim this to 4.4 percent of GDP in 2024/25 and further to 3.6 percent in 2026/27.

Apart from the debt servicing burden, taxpayers are also feeling the heat on imports such as fuel, processed food and other finished goods and raw materials for manufacturing goods. This is filtered to consumers through elevated prices.