Kenya’s dollar-denominated debt rises in six months

Kenya’s dollar-denominated external debt rose five percentage points to 45 per cent of the total in the first six months of the fiscal year 2014-15, Central Bank of Kenya data shows.

The rise in dollar exposure comes at a time the US currency has strengthened against the shilling that is six per cent weaker to the dollar since June 2014.

A stronger dollar pushes up the debt load in local currency terms on account of revaluation. Interest payments also rise since these payments are made in dollars.

“Kenya’s public and publicly guaranteed external debt increased by Sh84.8 billion to Sh1.17 billion in December 2014, from Sh1.086 trillion in June 2014. The growth in external debt during this period was largely driven by exchange rate revaluations,” said CBK in the recently released monthly economic review for December 2014.

“The proportion of external debt denominated in the US dollar increased from 40 per cent in June 2014 to 45.1 per cent in December 2014, while that denominated in Japanese Yen and Euro declined from 12.1 per cent and 29.9 per cent, respectively, to 10.1 per cent and 26.9 per cent, respectively, during the period under review.”

The portion of the debt that is dollar-denominated therefore increased by Sh93 billion in the six months to Sh527.7 billion.

According to CBK, the share of total external debt owed by the central government was Sh1.13 trillion, while the rest is debt owed by parastatals that is guaranteed by the government.

Multilateral lenders such as the World Bank accounted for 52.3 per cent of the external debt in December, down from 55 per cent in June, while the debt owed to bilateral lenders declined from 26.7 per cent to 24.5 per cent over the period.

Commercial banks took up the extra debt vacated by the traditional lenders, increasing their share of the external debt from 16.8 per cent in June to 21.8 per cent in December.

Kenya in the current fiscal year has borrowed Sh327 billion from China to build the standard gauge railway, and through a reopened sale of the successful Eurobond issue in late November raised a further Sh68 billion ($750 million) from foreign lenders.

Treasury has also factored Sh480 billion as the fiscal hole to be filled by borrowing both locally and externally in the 2015/16 fiscal year.

The CBK report shows that the country spent Sh9.3 billion in the six months to service external debt, comprising Sh6.6 billion in interest and Sh2.7 billion in principal repayments.

Treasury, however, maintains that Kenya’s total debt of Sh2.5 trillion—both domestic and external— is sustainable given that the money is going into project financing.

“Heavy investment in projects will yield enough revenue to pay the debt in future. Good investments and microeconomic environment, backed by good quality institutions would ensure debt sustainability, and therefore low risk,” said Treasury in a statement posted last week.

The Treasury said the country’s debt to GDP ratio of 46 per cent remains sustainable, and pointed out that in comparison some of the European Monetary Union (EMU) States have a debt ratio of 96 per cent.