The official forex reserves held at the Central Bank of Kenya (CBK) have fallen by Sh65.8 billion ($509 million) in the last three weeks following external debt repayments amid a delay in disbursement of new foreign currency loans.
CBK data shows that the reserves stood at $10.69 billion (Sh1.38 billion) on July 31, having fallen from the record high of $11.2 billion (Sh1.45 billion) on July 10.
The dip, while expected due to scheduled external debt service charges on the exchequer account, is indicative of the risk carried by the borrowing binge that has pushed Kenya’s public debt stock to Sh11.51 trillion, out of which Sh5.03 trillion is owed to external lenders.
In a note on Kenya published last week, global ratings agency Moody’s warned that in the absence of fresh inflows from concessional loans, the external debt service charges will test the forex reserves and in extension the exchange rate.
The agency highlighted the central bank’s proactive reserve accumulation strategy as a factor in the recent stability of the shilling at a range of Sh129 to Sh130 per dollar.
Buying dollars in the market has helped the shilling by balancing between demand and supply of the greenback, while the resulting higher reserves have also signalled to the market that the CBK has the necessary muscle to deal with volatility.
“A narrower current account deficit and higher international reserves, which now cover almost five months of imports, provide support. However, external amortisations (debt repayments) of around three percent of GDP could lead to a drawdown on reserves or renewed commercial borrowing in the absence of fresh multilateral funding,” said Moody’s in its note.
July and January are particularly costly months in terms of external debt service, largely due to principal and interest payments to China for the $5.08 billion (Sh656.6 billion at today’s rate) loans contracted in 2014 and 2015 for construction of the Mombasa-Nairobi-Naivasha standard gauge railway.
Last month, the payments to China stood at $431.9 million (Sh55.8 billion), comprising a principal charge of $305.64 million (Sh39.5 billion) and interest of $126.26 million (Sh16.3 billion).
The SGR repayments, which kicked in from 2019 after a five-year grace period, accounted for 81.3 percent of the country’s total outlay on external debt service last month.
Significant debt obligations included a semi-annual interest payment of $31.5 million (Sh4.1 billion) on the $1 billion (Sh129.25 billion), 12-year Eurobond that the country floated in mid-2021. The bond carries an annual coupon or interest rate of 6.3 percent.
The Eastern & Southern African Trade & Development Bank (TDB) was due to receive payments of $20.88 million (Sh2.7 billion), while bilateral lender France got $19.53 million (Sh2.5 billion), as per the World Bank disclosures.
Overall, the current 2025/26 national budget has an estimated Sh1.901 trillion earmarked for debt service, both in principal and interest payments.
Of this, Sh476.4 billion is for external principal debt payments, while the interest payable is Sh228.52 billion for external debt.
In the absence of new inflows from external loans, these foreign debt charges have the effect of cutting the forex reserves sharply and in a short period.
The Treasury usually sells the dollar proceeds of external loans to the CBK in exchange for shillings for deployment in local projects. It in turn buys dollars from the CBK when making external payments, which include loan service, purchase of government supplies and subscriptions to external organisations.
One of the loans that have been delayed is a $750 million (Sh97 billion) tranche from the World Bank under its Development Policy Operation (DPO) programme, which was due for drawdown in the previous fiscal year.
It was held up by the government’s failure to push through conditionalities tied to governance reforms, key among them the Conflict of Interest Bill 2023, which was eventually signed into law last week. State House referred the Bill back to Parliament with reservations in April for amendment.
In March, Kenya and the IMF also agreed to an early termination of the four-year, $3.6 billion (Sh465 billion) funding programme that was due to lapse in April —shelving the ninth and final review that would have unlocked a tranche of $490 million (Sh63.3 billion).
Instead, Kenya made a request for a new funding programme, but the Treasury did not include any expected funding from the IMF in the current budget in which the external funding component of the Sh923.2 billion fiscal deficit has been set at Sh287.7 billion.
