Kenya loans in yuan surge as dollar power cut by Sh850bn

This falls from 52.7 percent or Sh2.85 trillion before the conversion and 62.3 percent or Sh3.22 trillion in August last year.

It is a relief to the John Mbadi–led Treasury as it turns to currency swaps to lighten a repayment burden aggravated by expensive floating-rate dollar loans, including the three Exim Bank of China facilities that financed the modern railway.

The cut in loans denominated in the US currency will save taxpayers billions of shillings in annual interest payments due to the costly floating dollar-based interest rates compared to lower, yuan-based rates.

In addition to the financial relief, Kenyan officials attribute the currency switch to the fact that Kenya's external debt is concentrated in dollars, exposing the government to higher currency and interest rate risks.

The swap of the SGR dollar-based interest rates into yuan-based rates will save the country about Sh27.8 billion a year, reflecting the costly nature of dollar-based loans.

As of August, dollar loans accounted for 52.7 percent (Sh2.85 trillion) of Kenya' external debt, followed by euro loans at 27.3 percent (Sh1.475 trillion).

Yuan accounted for 12 percent (Sh648 billion) of the total external debt, despite China being Kenya's leading bilateral lender and trader, and 5.5 percent or Sh280 billion in August last year.

With the SGR conversion, the yuan share jumps to 21 percent, rising by Sh482 billion to Sh1.13 trillion, according to computation by the Business Daily.

The dollar share had already been sliding—from 62.3 percent (Sh3.22 trillion) in August last year to 52.7 percent (Sh2.85 trillion) this August, as the country aggressively tried to reduce its exposure to the greenback.

The currency swap also advances Beijing’s push to chip away at the dollar’s dominance by elevating the renminbi (RMB) in cross-border finance.

“China would want to popularise their currency, but it could be an uphill task to confront the euro, pound and dollar in the international currency market,” said Dr Kennedy Manyala, an economist.

Treasury data shows that China had extended several loans to Kenya, including its portion for the Thika Super Highway, in yuan but seemed to make a hasty retreat with the SGR loans.

Read: Kenya to save Sh27.7bn yearly on SGR loans after yuan switch

China Exim’s choice of the US dollar for Kenya’s three SGR loans in 2013 reflected how large cross-border infrastructure was financed then, according to a 2020 paper by the Center for Global Development.

The US dollar was the go-to currency for big cross-border finance—export-credit loans, trade bills, and global bonds—because it had the deepest money markets, standard pricing based on LIBOR, and easy ways to hedge risks.

That position saw China Exim’s typical credit loans written in dollars as “LIBOR plus a margin.”

This matched how Chinese contractors priced their equipment and how insurers and guarantors structured the deals
The Chinese currency renminbi (RMB), or the yuan's international use was still limited a decade ago.

Offshore RMB liquidity was thin, Africa had only begun setting up RMB clearing houses, and the currency had not yet joined the International Monetary Fund’s special drawing rights (SDR basket)—limiting benchmarks and swap markets.

Africa’s clearing houses of the yuan are not expected to eclipse the dollar in the continent anytime soon because the Chinese currency is tightly managed and traders are wedded to the greenback's flexibility.

The clearing house would cut the need for dollar settlements, speed things up and reduce costs.

The growing use of the yuan is a measure of China's challenge to Africa's traditional partners in Europe and the United States and reflects the increasing attractions of a continent with some of the world's fastest growing economies.

China's ties with Africa have expanded fast.

Analysts note dollar loans also aligned with Kenya’s realities: project payments, petroleum imports and reserve management were US dollar-centric, making disbursement and debt service simpler.

The pivot toward yuan came later, once RMB markets deepened and Kenya sought to reduce dollar exposure and interest costs.

Treasury officials reckon converting the SGR facilities to yuan shifts exchange-rate risk away from the dollar and broadens the external-debt currency mix.

The dollar’s dominance in Kenya’s debt mix strengthened around the time the SGR loans were signed on LIBOR + margin.

It was reinforced by forays into global capital markets, including the country’s first Eurobond issue in 2014—a dollar-denominated international bond. Before then, euro loans held the largest share in the portfolio.

The three SGR loans are serviced semi-annually in July and January. Mr Mbadi said the first instalment after the conversion decision had already been made in dollars while discussions continued.

“Because we couldn’t wait for the discussion, we had to honour our obligation. We have to work on how much is remaining. But it kicks in immediately,” he said, adding the next instalment will be paid in January.

Kenya borrowed a total of $5.08 billion (Sh656.54 billion) from Exim Bank of China for two SGR phases. Phase 1 (Mombasa–Nairobi) received facilities of $1,600,000,000 (Sh206.78 billion) and $2,003,584,028.87 (Sh258.94 billion), while Phase 2 (Nairobi–Naivasha) took $1,482,745,029.43 (Sh191.63 billion).

The loans are dollar-denominated with floating interest reportedly set at 3.6 percent or 3.0 percent above LIBOR—a global benchmark retired in June 2023 and replaced by SOFR and other reference rates.

Mr Mbadi said that in US dollars, the current cost comes to a little over 6.0 percent (about 4.6 percent SOFR + 2.0 percent margin). “But with renminbi it is about 3.0 percent,” he said.

Kenya—classified by the IMF as at high risk of debt distress—has taken steps to manage its liabilities since State finances came under severe pressure in 2024, when protests forced the administration to drop a Finance Bill that proposed Sh345 billion in new taxes.

Public debt stands near 70 percent of GDP, reflecting years of investment in infrastructure —roads, railways and ports—under the previous administration.

The government has revamped its Medium-Term Debt Management Strategy to smooth maturities and ease pressure on the Exchequer.

Beyond currency swaps, it is pursuing alternatives including a $170 million Samurai bond in Japanese yen, which Mr Mbadi said was at an advanced stage.

Kenya also plans a Sh129 billion debt-for-food swap with the World Food Programme (WFP) under which a bilateral or multilateral creditor would forgo part or all payments in exchange for a commitment to invest freed-up resources in food-security programmes.

Despite the latest shift, a large chunk of external debt remains in US dollars, leaving the country exposed to exchange-rate volatility. The dollar share also mismatches Kenya’s export earnings, much of which—tea and flowers to Europe—are invoiced in euros.

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