The government will spend Sh66 billion less in debt service costs for the financial year ending June 30, signalling savings for the Exchequer in the period.
Total debt service at the end of the 2023–24 fiscal year is now estimated at Sh1.79 trillion, down from Sh1.86 trillion, according to data from the second supplementary budget estimates by the Treasury.
The fall in the debt service costs is due to several factors, including gains made by the Kenya shilling, the partial redemption of the country’s debut sovereign bond in February, and lower-than-targeted new borrowing in the domestic credit market.
Internal debt service costs are expected to fall the fastest at Sh39 billion to Sh613.9 billion from the previous estimate of Sh653 billion.
External debt service is set to fall by Sh27.1 billion, reaching Sh1.18 trillion from Sh1.21 trillion, previously.
Falling external debt service costs are due to gains in the domestic currency, which have reduced the size of upcoming payments in Kenya shilling terms.
The Kenya shilling has rallied by more than 15 percent this year against the US dollar, resulting in substantive savings in, not only debt service costs but also the public debt stock.
In February, for instance, the stock of Kenya’s external debt improved in local currency terms to Sh5.65 trillion from Sh6.18 trillion in January, even as external debt in US dollar terms expanded to $39.38 billion from $38.51 billion previously.
“We estimate that we have reduced the shilling-denominated debt by about Sh1 trillion if you consider that our external debt stands at about $38 billion and we have reduced the exchange rate from Sh160 to roughly around Sh130,” Central Bank of Kenya (CBK) governor Kamau Thugge noted last month.
“That’s 30 shillings, and for every one shilling (gain in the exchange rate) we save the government Sh40 billion.”
At the same time, interest costs programmed for Kenya’s debut 2014 Eurobond up to June have fallen by Sh32.4 billion to Sh279.1 billion from Sh311.6 billion signalling the impact of the partial redemption in February.
Domestically, the under-issuance of new securities has saved the Exchequer Sh22.5 billion in interest payments on new loans scheduled for the fiscal year to the end of June.
This has offset expected higher internal payments covering funds on-lent to the government by the CBK from the International Monetary Fund and the overdraft borrowings by the State from the apex bank.
Debt service costs in the new financial year starting July 1 are, however, expected to rise to Sh1.85 trillion with interest payments alone expected to touch a high of Sh1 trillion from Sh846.3 billion.
Redemption costs are seen easing slightly to Sh843.2 billion from Sh946.1 billion currently.
Interest payments on public debt are expected to cost taxpayers at least Sh5 trillion over the next five years, of which Sh3.78 trillion will represent payments of domestic interest.
The interest payments on public debt are a mandatory charge on the consolidated fund services and are a first charge item, paid out before other expenditures.
