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.

The effects of a strong Japanese yen greatly affected the company between July 2008 and March 2009 when it appreciated by 34 per cent, thereby resulting in unrealised exchange loss of Sh896 million.

The company took JPY1.7 billion loan in 1990 at the rate of 2.5 per cent for expansion of production capacity.

Portland took the facility as part of a bilateral package negotiated by the government from the Japanese Bank for International Co-operation (JBIC).

The firm’s loss of Sh489 million as at December 31, 2008, was partially attributed to foreign exchange rate losses.

“This is going to hurt the competitiveness of imports from Japan in the local market,” said an official from the embassy of Japan in Nairobi who sought anonymity on protocol grounds.

A number of the country’s steel manufacturers import from Japan, hence the strong yen has direct budget implications on their operations.

More dollars

“The Japanese steel is expensive and the appreciation has made steel imports from Japan unsustainable,” said Mr Raval Narendra, the managing director at Devki Steel Mills.

Individual importers from Japan are set to pay more as a result of a 16 per cent rise in the strength of the yen against the dollar.

Since imports from Japan are priced in the yen, an appreciation in the currency means that one will require more dollars to acquire the same commodity.

Peter Mwaura of the Shina Trading, an importer of Japanese cars, says though the costs have remained the same in yen, the rising exchange rates have significantly pushed up the cost of cars.

“We have been affected since our clients are now paying more because we need more dollars for one Japanese yen,” he said.

Even though the yen is expected to depreciate with the end of global recession, it is likely that it will remain significantly high.