Strong yen raises cost of Kenya’s debt to Japan

The government stands to incur foreign exchange losses running into billions of shillings on Japanese debts due to a steady appreciation of the yen in the last three years.

Central Bank data for the year to July shows that the Japanese yen has appreciated from 81 Japanese Yen against the shilling in January to 94 on Monday.

That has pushed the annual average exchange rate from Sh55 three years ago to Sh87 for every 100 Japanese yen.

Kenya has received up to Sh451 billion from Japan, half of which was in form of loans and the remainder are grants and technical assistance according to a statement by the ambassador for Japan posted on the embassy’s web site.

Yen appreciation this year alone has increased the Sh223 billion debt by over Sh30 billion to Sh257 billion without factoring in the rate of interest and the appreciation in the last three years.

Japan is one of the highest lenders to the government of Kenya apart from the US and the European Union.

“Debt in the world market is always quantified in three currencies, the yen, the dollar and the Euro hence Kenya will certainly pay higher than it borrowed since Japanese debt is not likely to be paid for in Euros” said the World Bank chief economist Mr Wolfgang Fengler.

During the budget speech in June, Finance minister Uhuru Kenyatta allocated Sh18.7 billion for debt financing.

According to analysts the government can only avoid foreign exchange problem by borrowing from the domestic market.

“External debt is cheaper, but borrowing from the domestic market raises interest rates hence high inflation rates; it is a delicate balancing act,” said Linet Oyugi, a policy analyst with the Institute of Policy Analysis and Research (Ipar).

The latest appreciation of the Japanese yen has been on the back of the global recession and fears over the euro zone crisis, which triggered cautiousness towards the yen.

Kenya’s imports from Japan were worth Sh48 billion in 2009 and are expected to increase with expanding economic activities, according to Economic Survey 2010, hence the country’s risk of exposure to fluctuations in the yen remains high.

Firms holding yen-denominated debt are equally feeling the pinch.

The East African Portland Cement has seen her debt more than double.

“The money was borrowed in 1990 and we have an outstanding loan of JPY3.65 billion at an interest rate of 2.5 per cent, which has nearly doubled due to currency volatility” said an official from the company who asked to remain anonymous.