Weakening shilling increases public debt by Sh680 billion

Controller of Budget Margaret Nyakang’o. [Elvis Ogina, Standard]

Kenya’s weakening shilling against the US dollar has seen the country’s public debt rise by at least Sh680 billion in the last six months.

This comes even as the National Treasury embarks on a drive to raise more than Sh200 billion through new syndicated loans.

According to the Office of the Controller of Budget, the country’s stock of US-denominated debt has led to exposure to currency fluctuation that significantly increases the stock of public debt.

“The depreciation of Kenya shilling against the US dollar has led to an increase in the debt stock and debt repayments (principal and interest),” stated the Controller of Budget in submissions to Parliament’s Public Debt and Privatization Committee.

“The country’s average debt is estimated to increase by Sh40 billion every time the shilling drops a unit against the dollar.”    

The Kenyan shilling has fallen from Sh121 in trading against the US dollar in January this year to Sh141.7 last week, a 14 per cent drop that translates to a Sh680 billion increase in the country’s stock of dollar-denominated debt.

This is likely to increase the burden of repayment, piling more pressure on Kenyan taxpayers who are already bearing the brunt of the government’s drive to raise more tax revenue.

According to the National Treasury, the country’s repayment of the first $2 billion (Sh277.9 billion) Eurobond taken in 2013 will be significantly affected by the shilling depreciation against the US dollar.    

“The maturing sovereign bond in June 2024 is $2 billion equivalent to approximately Sh277.9 billion,” explains the National Treasury in submissions to Parliament’s Debt and Privatization Committee.

“This bond has a coupon/interest cost of 6.875 per cent. In light of the depreciating exchange rate, the National Treasury expects the Kenya shilling equivalent of this bond in June 2024 to be slightly higher than the current Sh277.9 billion.”

“Notably, the prevailing high-interest rates in the international debt capital markets coupled with the country’s rating means that Kenya is likely to rollover the June 2024 Sovereign Bond Maturity at a higher interest rate,” explains the National Treasury.

With the country’s currency already depreciating 14 per cent against the US dollar this year, the National Treasury anticipates further depreciation on the local currency that will increase the existing stock of public debt.     

“The exchange rate is assumed to continue depreciating at an average rate of 1.16 per cent in line with the IMF program under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF),” stated the National Treasury.

This comes even as the government takes to the foreign markets more syndicated loans in the midst of a cash crunch and pressure to repay maturing debts in the current financial year. 

Earlier this month Kenya acquired a new Sh70.3 billion ($500 million) three-year and five-year Syndicated Medium Term Loan, pushing the country’s external debt to cross the Sh5 trillion mark.    

In September and December last year, Kenya received Sh27.81 billion and Sh54.92 billion respectively from the International Monetary Fund (IMF).

By May 19, 2023, Kenya had received a disbursement of $900 million (Sh126.6 billion) from a syndicated facility and $1 billion (Sh141 billion) from the World Bank for budget support.

The government’s appetite for public debt is in sharp contrast to promises made by leaders to taxpayers about the country going back to international lenders for new debt.

“We could either go the Kibaki way where his administration raised tax revenues from Sh200 billion to almost 1 trillion,” president William Ruto explained at a recent function.

“Or we could go the way of the previous handshake government which raised public debt from Sh4 trillion to almost Sh9 trillion and now the country is almost being auctioned. We will go the Kibaki way; collect taxes and have everyone contribute.” 

The uptake of more loans also pushes the country towards more debt distress, a fact acknowledged by international rating agencies and the country’s own lenders.