Kenya’s official foreign currency reserves have fallen by $621 million (Sh70 billion) since the beginning of the year, largely due to repayments of loans from China for the construction of the standard gauge railway.
The hard currency reserves, held by the Central Bank of Kenya (CBK), shrunk from $8.817 billion (Sh1.001 trillion) at the beginning of January to $8.196 billion (Sh931.3 billion) on February 10.
World Bank data shows that Kenya’s external debt payments in January stood at $458.7 million (Sh52.1 billion), of which $388.6 million (Sh44.2 billion) was due to China in interest and principal repayments.
Kenya borrowed a total of $5.08 billion (Sh577 billion) in 2014 and 2015 from China to fund the Mombasa-Naivasha SGR line, with the loan repayments kicking in from January 2020 after a five-year grace period.
Other significant interest and principal repayments in January went to Trade and Development Bank (TDB), which received $21.45 million (Sh2.44 billion), and France, which was paid $20.83 million (Sh2.37 billion).
Interest on external loans is paid on a semi-annual basis —with bilateral and multilateral loans also incorporating principal payments— while sovereign bonds and syndicated loans have their principal paid back in form of a bullet payment at the end of the loan’s life.
This month, external debt service stands $244.2 million (Sh27.7 billion), comprising mainly a Sh12.5 billion payment to TDB and Sh8.8 billion in interest payment for the $2 billion (Sh227 billion) Eurobond issued in February 2018.
While the CBK does not normally disclose the details of its forex reserves expenditure, the funds are mainly deployed towards making external payments on behalf of the government, and in support of a depreciating shilling against volatility through dollar sales to the local market.
It in turn acquires the reserves through purchase of external loan proceeds from the Treasury, or buying dollars from the local market —especially when the shilling is gaining against the dollar.
These reserves are therefore key in backing the stability of the shilling, and also act as a signal to the market that the regulator has enough firepower to defend against volatility, thus discouraging speculative trading on the currency.
The shilling has been weakening consistently in the last six months, meaning that some of the reserves might have been deployed to support its stability in January.