Kenya will save $215 million (Sh27.79 billion) annually after converting its three dollar-denominated standard gauge railway (SGR) loans to yuan, with repayment in the Chinese currency set to start in January next year.
Treasury Cabinet Secretary John Mbadi on Tuesday said Kenya had already converted most of the dollar-denominated loans owed to Beijing to Chinese yuan, paving the way for the country to switch from the expensive floating, dollar-based interest rates.
He said as part of the country’s liability management, it was trying to diversify its debt-currency mix, which is currently concentrated in dollars. The low-hanging fruit in Treasury’s currency diversification is swapping US dollars with Chinese yuan.
“And that kicks in starting this financial year, immediately,” he said.
The three SGR loans are normally paid semi-annually in July and January. Mr Mbadi said the first instalment had been made in dollars while discussions were ongoing.
“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 on immediately,” he said.
The next instalment will be paid in January.
Kenya borrowed $5.08 billion (Sh656.54 billion) from China Exim Bank for the construction of the two phases of the SGR.
The first phase of the modern railway from the port city of Mombasa to Nairobi received two facilities of $1.6 billion (Sh206.78 billion) and $2 billion (Sh258.94 billion), while Phase 2 connecting the capital city to Naivasha took up $1.48 billion (Sh191.63 billion).
The loans are dollar-denominated and have floating interest rates reportedly set at 3.6 percent or 3.0 percent above the average London Interbank Offered Rate (Libor)—a global benchmark retired in June 2023 and replaced by SOFR and other alternative reference rates.
Mr Mbadi said in US dollars, the interest cost comes to more than 6.0 percent (about 4.6 percent SOFR plus two percent).
“But with renminbi it is about 3.0 percent,” he said.
Kenya, classified by the IMF as at high risk of debt distress, has been taking steps to tackle its loans since state finances came under severe pressure in 2024, when protests forced the administration to withdraw the finance bill with Sh345 billion in new taxes.
Public debt stands near 70 percent of gross domestic product, reflecting years of infrastructure investment, roads, railways and ports under the previous administration.
The government has revamped its debt-management strategy to smooth maturities and ease pressure on the exchequer. Besides currency swaps, it is also pursuing alternatives, including a $170 million Samurai bond issued in Japanese yen, which Mr Mbadi said is at an advanced stage.
Kenya will also issue a pioneering Sh129 billion debt-for-food swap with the World Food Programme, which will see a bilateral or multilateral creditor forgo part or all due payments in exchange for a commitment to invest the freed-up resources in food-security programmes.
A big chunk of external debt is in US dollars, exposing the country to exchange-rate volatility. The dollar share also mismatches Kenya’s export earnings, much of which—tea and flowers to Europe—are paid in euros.
Kenya therefore aims to rely more on the domestic market to finance the budget to cut FX risk.
Even as Kenya issued new Eurobonds to refinance notes maturing in 2024 and 2027—Sh258.4 billion ($2 billion) and Sh116.3 billion ($900 million)—it remains in talks with China to convert dollar-denominated SGR loans to yuan. The Treasury is also engaging the IMF on a new funded programme after the previous one lapsed in April.
“We need the IMF,” said Mr Mbadi. “Yes, our economic conditions have improved, but we must not lose sight that we need more concessional loans—and they come from multilaterals like the IMF and the World Bank.”
