Kenya is reluctant to tap the remaining Sh129.2 billion ($1 billion) loan from the United Arab Emirates (UAE) after falling global interest rates provided cheaper alternatives like Eurobonds.
Treasury Cabinet Secretary John Mbadi said it is not prudent to access the costly UAE that Kenya tapped to build a stronger trade pact with the Emirates.
Earlier this year, Kenya reached an agreement with the UAE for a Sh193.8 billion ($1.5 billion) seven-year commercial loan at an 8.25 percent interest rate, but only accessed the first tranche of Sh64.6 billion ($500 million) in April.
Global lending rates have dipped below the 8.25 percent rate on UAE debt, with Kenya in a position to borrow at 8.06 percent via a seven-year Eurobond.
“When we took the UAE loan of $500 million, Eurobond/market rates were above 10 percent, so we went for the UAE loan, which was at 8.2 percent. Today, the facility is at 8.2 percent, but we’ve got Eurobond rates below that,” said Mr Mbadi.
“It does not make sense to go for the UAE loan if Eurobonds are cheaper.”
The loan arrangement was reached at a point when international investors were demanding a steeper return to buy/hold Kenya’s debt as the pronouncement of US tariffs raised jitters around the world.
Kenya’s risk profile in the international markets has improved since the signing of the UAE loan arrangement.
The improved risk profile is the product of early bond buybacks and improved macro-economic factors, which eased investors’ concerns of default.
Eurobond yields peaked at 9.162 percent on Thursday last week for the sovereign bond maturing in 2048, while rates for papers with maturities between 2027 and 2032 were all below 8.2 percent, marking an improved risk perception.
The seven-year UAE loan was negotiated last year at a rate of 8.25 percent as the government widened its external financing options at a time when a four-year funded programme from the International Monetary Fund was nearing its end.
The UAE loan became the first commercial financing arrangement from the Gulf, with the government having previously relied on Eurobonds and syndicated loans, mostly from Western lenders, for commercial debt.
The UAE has had a growing influence in Kenya under the Kenya Kwanza administration, mainly through state-level business ties.
In March 2023, Kenya entered into a direct petroleum importation agreement with the UAE and Saudi Arabia, dubbed the government-to-government oil deal, at the height of a dollar crisis in the country.
The UAE also provided a private jet used by President William Ruto during his four-day State visit to the US in May 2024.
In May 2024, the Gulf State further pledged Sh1.9 billion ($15 million) in aid to Kenya to manage the effects of widespread flooding.
Mr Mbadi said Kenya has no obligation to take up the balance of the $1.5 billion UAE loan despite closer ties with the Emirati country. “We are not tied to one specific financing because of an agreement. We will only take it if it makes economic sense.
“If the World Bank DPO is available, it would be at concessional rates. If we can also get debt for development swaps or Samurai bonds, these would also be better options.”
Kenya’s external financing requirement stands at Sh287.4 billion on a net basis for the 2025-26 fiscal year, with the bulk of the sum expected to be sourced from commercial sources.
In the 2026-27 financial year, this requirement is expected to fall marginally to Sh241.8 billion.
The Treasury has a wide set of external financing options, including financing from the African Development Bank, while it pursues new instruments such as debt-for-food swaps and sustainability-linked bonds.
