Currencies

State downplays impact of weaker shilling on debt

debt

Public Debt Management Office director-general Haron Sirima. PHOTO | DIANA NGILA | NMG

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Summary

  • The cost of servicing the country’s debt has risen this year after the shilling fell to lows of Sh112.63 against the greenback.
  • The Treasury says it has prepared for the exchange rate fluctuations by among other things balancing the foreign currency denominations of the debt to reflect export earnings.
  • Kenya’s debt to gross domestic product ratio, estimated at 68 percent as of June 2021, is forecast to rise to 70 percent by the end of the 2022/23 fiscal year.

The Treasury says it had prepared for the increase in eternal debt payments as a result of a depreciation of the shilling against the dollar.

The cost of servicing the country’s debt has risen this year after the shilling fell to lows of Sh112.63 against the greenback.

Public debt stood at Sh7.7 billion at the end of June, with domestic debt accounting for 48 percent and external debt 52 percent. The government expects to spend a record Sh1.17 trillion in the current fiscal year on loan servicing and repayments and Sh1.36 trillion in 2022/2023.

The Treasury says it has prepared for the exchange rate fluctuations by among other things balancing the foreign currency denominations of the debt to reflect export earnings.

Kenya’s debt is mainly dollar-denominated with lesser amounts in euro and British pound.

“The National Treasury had factored exchange rates movement in the 2021/22 budget for external debt service,” said Haron Sirima, director-general of the Public Debt Management Office at the Treasury.

“Management of foreign exchange risk exposure is a continuous process guided by the annual mid-term debt strategy. The foreign currency mix broadly reflects that of Kenya’s export earnings thus forex risk is minimised.”

There are, however, 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 70 percent by the end of the 2022/23 fiscal year.

This could increase at a faster rate if the shilling continues to slide, especially if there is heightened political risk next year that would curtail investment inflows into the country. The shilling has depreciated by three percent against the dollar this year.

The currency has normally been stabilised by dollar flows from remittances, export earnings, external debt proceeds, and more recently by additional allocation of Special Drawing Rights from the International Monetary Fund.

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