Demand for foreign exchange by the government to meet debt payments and international obligations helped the Central Bank of Kenya (CBK) double its income from selling hard currencies in the year ended June 2019.
CBK said in its annual report for 2019 that its net gain on sale of foreign exchange currencies jumped to Sh8.93 billion in the 12 months to June 2019 from Sh4.55 billion in a similar period in 2018.
This helped boost net trading income to Sh10 billion from Sh4.2 billion in 2018.
“Net trading income increased by Sh5.854 billion to Sh10.099 billion (2018: Sh4.245 billion) due to increased government payments during the year,” CBK said in the annual report.
When the government borrows in dollars, the Central Bank buys the forex and funds the consolidated account with Kenyan shillings for funding the government operations.
It sells back the dollars to the government when the Treasury is making payments for external loan interest and principal at the prevailing market rates, which due to weakening of the Kenyan currency has seen the government forced to offer more shillings to buy the dollars from CBK, hence the gain.
CBK also sells dollars to commercial banks, which is one of the ways of controlling exchange rate volatility.
Kenya has increasingly tapped into foreign loans which now make up more than half of the entire debt portfolio of Sh6.8 trillion debt, which carries a huge currency risk in the event of shilling depreciation.
According to the National Treasury Quarterly Budget Economic Review, in dollar terms, external public debt stock increased by $5.602 billion from $23.95 billion in June 2018 to $29.55 billion by the end of June 2019.
Although the debt is evenly distributed among bilateral lenders (33 per cent), multilateral institutions (30.2 per cent) and commercial banks (36.2 per cent) the terms of the commercial lenders are strict, short and expensive, squeezing the government hard and putting pressure on repayments.
By the end of June 2019, the total debt service obligations to external creditors amounted to Sh369.8 billion. This comprised Sh266.2 billion in principal and Sh103.6 billion in interest payment.
The Treasury said that out of this, 76 percent was paid out to commercial banks, 17 percent to bilateral sources and seven percent to multilateral institutions.