Shilling gain cuts external debt by Sh1.12 trillion

Photo credit: Graphic by Stanslaus Manthi | Compiled by Tim Odinga

The stock of external debt has fallen by Sh1.124 trillion in less than three months as a result of the shilling strengthening against major currencies.

Data released by the Central Bank of Kenya (CBK) shows the country’s stock of external debt at the end of last week stood at Sh5.06 trillion, down from Sh6.19 trillion at the end of January.

The 18 percent fall has been fully attributed to the local currency gaining to exchange at 131.56 against the dollar at the end of last week from a record low of 161.36 at the end of January.

Further analysis by the Business Daily on the CBK’s disclosure reveals that a gain in the local currency by one unit against the dollar leads to a fall in external debt of around Sh37.7 billion.

The shilling which has now appreciated by 20 percent since late January has eased pressure in the money markets and is expected to bring down the cost of imports and debt service.

The local currency gain is the resultant effect of the policy mix with the benchmark rate being raised by 425 basis points (4.25 percent) over a 12-month period to the current 13 percent.

Oversubscription of the infrastructure bond and the successful issuing of a Eurobond in February that raised $1.5 billion have also played a big role in boosting foreign investors' confidence.

Proceeds from the Eurobond were used in liability management (paying part of the 2014 Eurobond that matures in June).

The partial settlement of the Eurobond also reduced the likelihood of the country defaulting on its external obligations, fears that were growing in the international community.

Disclosures by the Treasury revealed that Kenya’s debt to GDP ratio had risen to 69.7 percent attributed to the ballooning external debt as a result of the poor performance of the local currency that extended to the first two months of the year.

Kenya’s external debt is largely dollar-denominated, standing at 67 percent in January followed by a fraction in Euro at 21.4 percent.

Overall total public debt at the beginning had shrunk to Sh10.12 trillion from 11.24 trillion in January.

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