Sh1.47 trillion or 71.7 per cent of Kenya’s external debt stock of Sh2.43 trillion was in dollars by the end of June 2018.
Dollar-denominated loans accounted for a paltry 32.3 per cent of total external debt in 2013, which at the time stood at Sh843.6 billion.
The dollar’s dominance of the debt basket has become a huge point of financing risk for Nairobi should the US currency strengthen significantly against the shilling.
The Uhuru Kenyatta administration’s appetite for dollar-denominated loans has left Nairobi with nearly three quarters of its total foreign debt in dollars – increasing the country’s exposure to US shocks.
The Treasury’s 2018 annual public debt management report shows that Sh1.47 trillion or 71.7 per cent of Kenya’s external debt stock of Sh2.43 trillion was in dollars by the end of June 2018.
Dollar-denominated loans accounted for a paltry 32.3 per cent of total external debt in 2013, which at the time stood at Sh843.6 billion. The euro accounted for 33 per cent or the largest component of the basket of currencies at the time but has since come down to 15 per cent.
The dollar’s dominance of the debt basket has become a huge point of financing risk for Nairobi should the US currency strengthen significantly against the shilling and other currencies.
Over the past five years, the dollar has picked 14 per cent strength against the shilling, the exchange rate having moved from 86 to 100.
Economists said it should now be prudent for the Treasury to look at rebalancing the currency mix by insisting on different currency loans when borrowing from bilateral partners such as China.
“The increased borrowing from China (mostly in dollars) is likely to be the main driver of the increased concentration of dollar debt… To reduce risks from dollar strengthening, it would make sense to borrow more in yuan if possible,” said Mark Bohlund, Africa and Middle East senior economist at Bloomberg.
The swing to the dollar in the past five was partly fuelled by two Eurobond issues in 2014 and earlier this year for a total of $4.8 billion (Sh480 billion) and the Sh429 billion ($4.3 billion) Kenya has borrowed from China for construction of the standard gauge railway.
Eurobond loans are denominated in the US currency.
Kenya has also taken up a series of syndicated loans in the past few years running into hundreds of millions of dollars at a time, and has refinancing maturing issues in the same currency.
The debt composition also reflects Kenya’s recent shift from concessionary lending in favour of commercial debt in the form of Eurobonds and syndicated loans.
The country has in recent years found it more difficult to attract concessionary loans after it moved from the low-income economy it was to the lower-middle-income band with the rebasing of the economy in 2014.
Japanese yen loans accounted for 15.1 per cent in 2013, but have come down to 4.3 per cent, while loans in British pound now account for just 2.7 per cent of total foreign debt compared to 5.5 per cent five years ago.
Chinese yuan debt has, however, grown, reflecting Kenya’s increased borrowing from the Asian economy, and now accounts for 6.2 per cent of total debt up from 5.8 per cent in 2013.
In its 2018 annual public debt management report, the Treasury says the currency mix of the foreign debt reflects the source of external funding, which has largely gone to financing infrastructure.
“The dominant currency in 2011 was the euro at 34.4 per cent while the dollar dominated in 2018 at 71.6 per cent due to various dollar-denominated loans contracted during the period,” the Treasury report says.
The higher dollar loan portfolio is also likely to affect the way the Central Bank of Kenya (CBK) balances the basket of currencies in its foreign reserve holdings, which currently stands at $8.44 billion.
The bank is likely to remain overweight on the US currency to match the obligations of foreign debt servicing, and also due to the fact that the dollar is Kenya’s main medium of exchange in international trade.
The imbalance, however, leaves Nairobi exposed to the movement of the dollar, unlike keeping a more balanced mix of hard currencies.
In 2009, the then CBK governor Njuguna Ndung'u had insisted on a balanced basket of reserve currencies to reflect import needs more closely to better protect the shilling from shocks in case the dollar gained sharply.
Kenya's biggest source of imports are China, India, Japan, the Gulf (mainly petroleum), South Africa, Indonesia, Uganda and Germany.
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