Kenya pays extra Sh5.4 billion for foreign debt on strong dollar – Business Daily

Kenya pays an extra Sh5.4 billion for foreign debt on strong dollar. PHOTO | POOL
A weakened shilling cost Kenya an extra Sh5.4 billion in external debt servicing in the year ended June, underlining the impact of the currency woes on the country’s loan repayment obligations.
Controller of Budget Margaret Nyakang’o has disclosed that she approved the additional payment because of the forex fluctuations.
The shilling weakened about 9.25 per cent against the dollar in the year to June to Sh117.83, putting pressure on the Treasury to seek additional billions for repayment of mounting foreign debt.
Kenya’s foreign exchange reserves have also been shrinking partly because of repayments to bilateral and commercial lenders and the central bank’s intervention to try and slow the shilling’s depreciation against the dollar.
“The Controller of Budget approved payments for exchange rate shortfalls for the financial year 2021/22 of Sh5.48 billion,” Dr Nyakango says in a report.
“The Kenyan currency has been depreciating against other currencies, leading to the growth of the country’s external debt.”
The shilling has since last year come under pressure following the reopening of the economy in July last year, with firms reporting rising demand for goods that in turn translated to higher dollar demand from importers.
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Kenya has since last year come under increasing pressure over mounting debt repayments due in part to the matured Chinese loans following the expiry of a six-month relief that Beijing had extended to Nairobi last year.
A huge chunk of the debt that Kenya is servicing includes the loans that were used to fund the construction of the standard gauge railway from Mombasa to Nairobi, roads, bridges and power plants.
Kenya spent Sh305.34 billion to service debt in the year that ended June as the dollar fluctuations forced the Treasury to reallocate more cash for the repayments.
The Controller of Budget’s data shows that taxpayers paid Sh861.35 million in January— the highest amount that Kenya was forced to pay in a month due to the weakening shilling— in the year ended June.
The lowest amount that Kenya was forced to pay due to the weakening shilling in the year under review was Sh199.48 million in June, according to the data.
The country had last year sought a further extension to the Beijing moratorium amid the increasing pressure of the debt payment.
Beijing gave Kenya a six-month relief on debt servicing that lasted until June 30 last year, helping Kenya temporarily retain Sh27 billion, which was due for six months.
Kenya then sought another extension on the relief to December last year but Beijing rejected the request due to Kenya’s status as a lower-middle income.
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Dr Nyakang’o further disclosed that she approved an extra Sh1.77 billion to cover shortfalls in external debt payments in the first quarter of the current financial year.
The official shilling-dollar exchange rate published by the Central Bank of Kenya stood at 122.63 units last Friday and a continued slide of the shilling will further balloon Kenya’s external debt.
The continued weakening of the shilling against the dollar adds to the bumpy ride that President William Ruto faces in steering Kenya’s public debt on a sustainable trajectory.
Dr Ruto’s administration inherited a debt of Sh8.6 trillion which promises to further stretch the government’s ability to free up cash for development projects.
Debt repayments are for the first time expected to surpass the cost of running the national government— including recurrent expenses such as salaries and other operations costs.
For example, Kenya used 63.5 per cent of tax collections in the first two months of the current financial year to repay its creditors, pointing to an elevated risk of debt distress.
Debt servicing costs amounted to nearly Sh177.95 billion in July and August against a record Sh280.23 billion in tax receipts, according to Treasury data.
The country will spend Sh1.36 trillion for debt repayment in the current financial year.
Kenya’s foreign exchange reserves — largely used for government payments like servicing external debts and essential government imports like medicine — last month dropped to the lowest in seven years, breaching the critical level of four months’ import cover.
The reserves stood at $7.04 billion, equivalent to 3.94 months of imports.
It’s the first time Kenya’s reserves have fallen to less than four months of import cover on a daily basis since October 2015, according to data compiled by Bloomberg.
Reserves fell from $7.4 billion, or 4.19 months of estimated imports, on September 26. Kenya targets 4.5 months of import cover.
Additional inflows are, however, imminent after a successful fourth review of Kenya’s International Monetary Fund programme.
Seasonal foreign exchange from remittances, tourism and horticulture is expected to also boost reserves.
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