Foreign interest payments in the first eight months jumped by Sh19.3 billion following the sharp weakening of the shilling against the dollar that pushed up the cost of servicing external debt.
Data from the Central Bank of Kenya (CBK) shows that expenditure on foreign interest jumped by over a fifth to Sh108.6 billion in the period in the eight months to February.
In a similar period last year, the National Treasury paid Sh89.3 billion in interest on external loans.
Much of the growth in foreign interest payment was due to a depreciation of the shilling, which lost an estimated 11 percent against the dollar in the period under review, reflecting the impact of the forex woes in the wake of the mounting public debt.
There was also an increase in debt service payments due to bilateral debt in what the National Treasury has attributed to the end of Debt Service Suspension (DSSI) extended to Kenya to the end of December 2021.
Kenya’s debt distress has since been raised from moderate to high with the IMF in a 2018 paper noting that the country’s interest payments increased to almost one-fifth of the country’s revenue.
Foreign interest payment as a percentage of the tax revenue hit a high of 16 percent in August 2020 before it trended downwards to a single digit.
However, it has started going up from 6.54 percent in October last year to 8.8 percent in February.
In the current financial year ending June, the country is expected to pay Sh138.4 billion in interest payments, a figure that is likely to increase due to the weakening of the shilling.
A big chunk of the payment— Sh23.6 billion— will be paid to the Exim Bank of China.
The second highest-paid external creditor will be the holders of the 2018 Eurobond who will receive Sh17.3 billion as interest payments.
The Debut Eurobond has an interest charge of Sh15 billion in the current financial year.
Historic low
Kenya’s external debt ballooned by a staggering Sh390 billion, giving dimension to the impact of a weakening shilling whose exchange rate against the greenback has tanked to a historic low of Sh135.19.
CBK data shows that total external debt as of January stood at $37.63 billion (Sh4.7 trillion), where the mean exchange rate was 124.4 against the dollar.
This means that at the current exchange rate and the stock of debt has been inflated to Sh5.09 trillion, pushing up the cost of servicing some of Kenya’s foreign loans as they fell due during the review period.
By February the National Treasury paid Sh694 billion for debts, an increase of Sh27 billion in a similar period last year, with part of the increase being attributed to the weakening of the shilling which pushed the cost of servicing foreign loans.
The growth of interest payments has been due to the country’s reliance on expensive loans such as Eurobonds and syndicated loans.
After Kenya rebased its economy to become a middle-income country, it came to rely heavily on expensive commercial loans from China, banks and international capital markets to bridge its infrastructure gap.
However, the economic returns of these loans have not come in as fast as the debt, with the gross domestic product (GDP) growing slower than the debt.
Between 2010 and 2015, the country’s Budget deficit – the difference between the money it spends and the money it raises through taxes – was among the lowest in Africa at 1.9 percent of GDP, analysis of IMF data shows.
Compared to other sub-Saharan African countries, Kenya’s Budget deficit placed it at position 14.
IMF, which in 2018 noted that Kenya’s probability of defaulting had increased from low to moderate, said interest payments on the public debt increased to almost one-fifth of the country’s revenue, putting it among the top five frontier economies.
