Shilling slip adds Sh139b to Kenya’s debt in five months

Imagine leaving the banking room on an afternoon in June of this year after confirming that your outstanding loan is 100,000 Sh.

But five months later you are told that you now owe the bank 103,440 Sh.

“How is it possible?” you wonder loudly.

To that, the bank teller said curtly, “Your loan was in US dollars, remember? “

Then it hits you. In June, one dollar stood at 107.85 Sh. It was still weak against the pre-pandemic exchange rate of 102.4, but today it is trading at a staggering sh111.5 against the greenback.

Our borrower here might as well be Kenya. Thanks to the weakening of the shilling against the dollar, Kenya’s external debt, even before including new borrowing, swelled by 137.76 billion shillings.

At the end of June, the country’s foreign debt, in dollars, stood at 37.23 billion dollars.

With the exchange rate then at 107.85, this put the country’s external debt at Sh4.015 trillion.

Suddenly the shilling was in free fall, with most analysts unable to give a precise and conclusive reason.

At the time of going to press yesterday, one dollar stood at 111.59 shillings. This means that Kenya’s external debt has since swelled to Sh4.154 trillion. A volatile exchange rate puts pressure on public finances as the country now needs more local currency to repay a foreign loan, especially if it is denominated in US dollars. “The fear of a weakening shilling inflating the country’s external debt is at the heart of the Central Bank of Kenya’s (CBK) obsession with the currency,” said one analyst, who requested anonymity.

Stabilizing the exchange rate so as not to make the country’s debt expensive is one of the reasons the CBK is intervening in the market.

The regulator insists it is only entering the market to smooth out the rough edges – the volatility that could lead to a financial crisis.

But analysts believe that with a little financial discipline, the country would have avoided this additional debt burden and used the money for other basic needs such as security, health care or education.

It is even worse that much of Kenya’s debt (nearly seven-tenths) is in dollars.

At the end of June of this year, the country’s total debt stood at 7.71 trillion shillings, an increase of 1.02 trillion shillings from 6.69 trillion shillings in the same month. ‘last year.

This means that the government has borrowed an average of 2.8 billion shillings per day, which experts say may hurt ordinary Kenyans if the trend continues.

Since March of last year, when the country recorded its first case of Covid-19, the government has borrowed 1.4 trillion shillings.

The Treasury argued that high borrowing since March of last year reflects difficult conditions brought on by the Covid-19 pandemic, which has squeezed state revenues. In one of its documents, the National Treasury attributed the increase in the stock of public debt to the increase in disbursements intended for budget support, Covid containment measures, the financing of ongoing development projects. and new and fluctuating exchange rates.

However, critics point to corruption and waste for contributing to inflated spending, resulting in excessive borrowing.

Debt denominated in foreign currencies accounted for 51.2% of total debt, a situation that protects the country from exposure to currency risks is moderate, according to the Treasury.

“The government is doing everything it can to minimize its external exposure to exchange rate fluctuations by selecting the optimal risk minimizing the currency composition of the debt. This was made possible by reducing the reliance on US dollar-denominated debt and encouraging exports of goods and services, ”the Treasury said.

The proportion of foreign debt held in US dollars fell from 67.3 percent in June of last year to 66 percent in June.

But that’s still high for a border market economy like Kenya’s, according to Sara Wanga, head of research at AIB Capital, an investment bank.

“This raises concerns about Kenya’s debt sustainability. As the shilling continues to depreciate, this will continue to be a problem, ”Wanga said.

The share of euro external debt rose to 19.4 percent at the end of June of this year, from 18.0 percent in June of last year.

At the end of June, 6.3% of foreign debt was denominated in Japanese yen, 5.6% in yuan, 2.5% in pounds sterling, while other currencies represented 0.2%.

Borrowing from commercial banks (syndicated loans) and Chinese loans such as standard gauge railway construction and Eurobonds increased the share of Kenyan dollar denominated loans.

The depreciation of the shilling against the greenback has thus given nightmares to the Treasury mandarins.

“If your exchange rate is not stable, then you have this immediate effect on your debt payments,” said Ndoho Wahoro, managing director of Euclid Capital and former managing director of public debt management.

The solution, which the Treasury has started to implement, is to stop commercial borrowing.

“Before you can start building underwater, at least plug the hole,” Ndoho said. Unfortunately, the judgment mainly concerns syndicated loans, which are granted by a group of banks.

“He (the government) still wants to go for the Eurobond, which is also a commercial market,” Ndoho explained.

The government, which recently issued its fourth Eurobond, may not sever ties with the debt instrument as it still believes it has a good reputation.

There is a lot of liquidity in the market that he thinks he can tap into for cash management purposes.

“The euro-bond will always be more attractive to governments than even the multilateral one because it is not subject to any conditions. It’s a purely commercial arrangement, ”added Ndoho.

Just over half of the country’s public debt (Sh4.01 trillion) is foreign loans largely from multilateral lenders and sovereign bonds such as the Eurobond.

The remaining 3.7 trillion shillings is domestic, which the government obtains largely by issuing treasury bills, short-term government debt, and longer-term treasury bonds.

The government of President Uhuru Kenyatta has now borrowed 5.82 trillion shillings in the eight years since 2013.

That’s nearly five times what former President Mwai Kibaki borrowed in 10 years – 1,200 billion shillings – from June 2003 to June 2013.

President Kenyatta insists that most of the borrowed money was used to grow the economy, which is reflected in the expansion of GDP, or the measure of the national cake, of 4.3 trillion shillings. in 2012 to 10.3 trillion shillings at the end of last year. .

Comments are closed.