The depreciation of the shilling inflated Kenya’s external debt by the equivalent of Sh69 billion in the first four months of this year, negating an actual decline of $250 million in the hard currency value of the borrowings in the period.
The latest public debt data from the Central Bank of Kenya (CBK) shows that external debt measured in dollars stood at $36.9 billion at the end of December, equivalent to Sh4.174 trillion at the prevailing exchange rate of 113.14 to the greenback.
The debt fell to $36.65 billion at the end of April on account of some principal repayments to China and the Trade and Development Bank (TDB), but the shilling equivalent rose to Sh4.243 trillion after the exchange rate weakened to an average of 115.80.
The variance reflects the risk carried by a weakening currency on the external debt, where the Treasury requires more shillings to service debt obligations including interest payments.
The shilling has depreciated against the dollar by 3.9 percent this year, exchanging at an average of 117.7 on Monday, meaning that June external debt figures will likely reflect a deepening of the exchange losses on the country’s foreign payment obligations.
There are, therefore, concerns that the depreciation of the shilling will hurt the already strained debt ratios that measure debt sustainability.
Kenya’s debt to gross domestic product ratio, estimated at 68 percent as of June 2021, is forecast to rise to 72.6 percent by the end of the 2022/23 fiscal year.
This could increase at a faster rate if the shilling continues to slide and the government fails to cut its budget deficit, amid prevailing higher interest costs for new debt issuances.
Analysts at NCBA said in a weekly fixed income report that the combination of higher borrowing costs for new loans and a weaker shilling is likely to result in debt service obligations taking up more than 35 percent of total expenditure in the 2022/23 fiscal year.
The analysts warned that these public debt concerns will likely steer the government away from its fiscal consolidation plan given the limited scope it has to reduce expenditure.
The government is likely to ramp up borrowing from the domestic market and from bilateral lenders, with rising interest rates making it more expensive to issue new Eurobonds.
