Time flies with great content! Renew in to keep enjoying all our premium content.
Prime
Why CRA wants cap on single currency in external borrowings
Chairperson of the Commission on Revenue Allocation (CRA) Mary Wanyonyi address senators during Senate mid-term assessment and planning retreat on February 6, 2025 at Enashipai Resort in Naivasha, Nakuru County.
The Commission on Revenue Allocation (CRA) wants Parliament to impose a ceiling on the share of external debt Kenya can hold in a single currency, saying this will reduce the inflation of debt service costs when the shilling weakens against the dominant currency in the debt mix.
The CRA, whose mandate includes offering recommendations on financial management and fiscal responsibility at national and county governments, made its suggestion in a presentation to the National Assembly’s Liaison Committee on the 2025 Medium Term Debt Management Strategy.
A weakening shilling raises the value of foreign debt in local currency terms, making the debt ratios worse and increasing the cost of servicing the loan for the Exchequer.
The Treasury usually buys dollars from the Central Bank of Kenya to make foreign debt payments, hence the exchange hit under a weak shilling regime.
“The high composition of external debt in the US dollar increases the cost of external debt servicing in the event of high depreciation of the shilling against the dollar.
“Parliament, therefore, needs to legislate an upper ceiling within which external debt composition in any currency should not surpass,” said the CRA in its submissions to the committee.
This exposure risk was realised in 2023 when the shilling depreciated against the dollar by 21 percent. It increased the shilling value of external debt by Sh1.42 trillion to Sh6.09 trillion in the year, while the dollar value went up by $1.04 billion to $38.92 billion.
In 2024, when the shilling reversed its position and appreciated by 21 percent against the dollar, the shilling value of the external debt fell by Sh1 trillion to Sh5.06 trillion, even as its dollar value rose to $39.11 billion from $38.92 billion.
The lower value of the foreign debt in shilling terms helped improve the country’s debt sustainability metrics, including the debt-to-gross domestic product ratio, which declined to 65.7 percent in June 2024 from 72 percent in June 2023.
Kenya’s external debt is highly exposed to the US dollar, which as per the latest disclosures from the National Treasury accounted for 62.1 percent of the total foreign debt stock of Sh5.17 trillion ($39.93 billion) in June 2024. It was followed by the euro at 25.5 percent, the Chinese yuan at 5.5 percent, the Japanese yen at 4.2 percent, and the British pound at 2.6 percent.
The dollar’s share has grown to the current levels from 42.8 percent in 2014, reflecting Kenya’s increased tapping of concessional loans from the International Monetary Fund and World Bank—which lend in dollars— and a series of Eurobond issuances, which are also dollar-denominated.
In 2014, the debt euros stood at 28.5 percent, while yen-denominated debt stood at 11.5 percent and the pound at 4.7 percent.
The rise in prominence of Chinese loans due to the country’s funding of major ticket infrastructure projects such as the standard gauge railway and roads has helped raise yuan-denominated debt from 4.7 percent to 5.5 percent in the decade.
