Why Kenya wants to switch to Chinese yuan
The National Treasury wants to start borrowing directly in Chinese and other foreign currency to reduce reliance on the dollar.
Kenya whose largest creditor is China, accounting for 57 per cent the country's total external debt of $4.51 billion, has over 56 per cent denominated in dollars.
This means when Kenya goes to borrow in China where it receives yuan, it wires the money through a bank that sells it dollars and does a similar conversions when making payments, incurring currency losses.
In the current Budget policy statement, Treasury has indicated that it wants to diversify the currency with which the country borrows, to safeguard the economy against exchange rate risks.
"On the external financing front, the Government will minimise the degree of foreign exchange rate risk exposure associated with the external debt portfolio by adopting a deliberate approach in diversifying currency structure so as to hedge against exchange rate risks especially to new loan commitments," the Budget Policy reads.
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According to an April 2015 budget report, the stock of Kenta's debt was denominated 56.8 per cent in dollars, 22.3 per cent in Euros, 9.6 per cent in Japanese Yen, 5.5 per cent in Great British Pound and only 4.4 per cent in Chines Yuan.
"I think the government wants to add the yuan into the basket of currency which it borrows because we do a lot of business with China but borrow in dollars and the government does not say who incurs the exchange rate costs," an analyst who did not want to be named told The Standard on Saturday.
This has partly been to a lack of a Yuan clearing house to process the growing Chinese loans to Kenya at an annual rate of 54 per cent between 2010 and 2014.
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However in 2015, National Bank opened a clearing house for Chinese renminbi (RMB) at its Yaya Centre Premium Branch that would allow the settlement of trade deals by processing payments locally through an agreement between the Kenyan and Chinese Central Banks.
The country also undergoes a lot of currency pressures when repayment of dollar debt comes due, and the government has to buy significant amounts of foreign reserve dollars which exert pressures on the Kenyan shilling exchange rate.
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Just recently, CBK has used up Sh30.9 billion of the country's foreign currency reserves in the last six weeks to cushion the shilling and pay debts, sending import cover to a five month low.
Last week, foreign reserves stood at $7.4 billion (Sh754.6 billion) down from $7.8 billion (Sh792.6 billion) on October 6, bringing the import cover down to 4.7 months of import cover, levels last seen in June.
CBK was under similar pressure to spend foreign currency to settle the other Eurobond coupon in June that saw reserves dip coupled with the market uncertainties after Britain voted to leave the Eurozone.
Kenya issued the $2 Billion Sovereign Bond in June, 2014 and the tap sale of $750 Million in December of the same year.
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National TreasuryChinese yuanCentral Bank of Kenya (CBK)