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Kenya to pay China Sh35 billion this month as debt holiday ends

BUSINESS
By Dominic Omondi | July 12th 2021

A section of Standard Gauge Railway (SGR) near Kitengela area along Mombasa road.[Elvis Ogina,Standard]

Kenya is expected to pay China $325.6 million (Sh35.2 billion) by end of this month, a situation that will eat into its bumper harvest of foreign exchange (forex) reserves in the last few weeks.

The payment will include a principal of $183.5 million (Sh19.8 billion) and an interest of $142.2 million (Sh15.4 billion), according to data from the World Bank.

The payment includes the country’s first repayments of the loans from the Export-Import (EXIM) Bank of China used to fund the building of a Standard Gauge Railway (SGR), but was suspended after China agreed to the Debt Service Suspension Initiative (DSSI) under the G-20 - a group of wealthy nations.

China Development Bank, also a key lender, however, stayed away from the DSSI under the G-20 framework. The one-month payment is more than the Sh27 billion ($245 million) that Kenya saved after China suspended some payments that were due to EXIM Bank from January through June.

Kenya, however, has been pushing for the extension of the debt repayment holiday to December 2021 when the DSSI is expected to end, after which it will be replaced by a programme to have the bilateral debts restructured under a common framework.

Luckily, the country’s pot of hard currencies critical for balance of payments - as payment of external loans received a major boost after the International Monetary Fund (IMF) and the World Bank disbursed some loans to Kenya.

This pushed the country’s official reserves of foreign currencies to $9,590 million (Sh1.34 trillion) by end of Friday.

This was the highest level since July last year. Additionally, Kenya raised $1 billion (Sh108 billion) by issuing its fourth Eurobond which also added weight to its forex reserves.

In its Weekly Bulletin, the Central Bank of Kenya (CBK) said the usable foreign exchange reserves remained adequate at $9,590 million (5.86 months of import cover) as of July 8, 2021.

“This meets the CBK’s statutory requirement to endeavour to maintain at least four months of import cover, and the East Africa Community (EAC) region’s convergence criteria of 4.5 months of import cover,” said the CBK.

Having adequate reserves is good news for the Shilling. With more hard currencies, it means the local currency is not under pressure where there is so much of it is chasing fewer hard currencies including dollars, euros, Chinese yen and sterling pounds.

However, debt repayment can put pressure on the reserves, with the country’s total external debt repayment, including Eurobonds and bilateral loans, estimated at Sh39 billion by the World Bank.

Besides debt repayment, the Shilling can also come under pressure from activities in the global market, particularly in the prices of crude oil.

During the week, CBK noted, international oil prices increased marginally due to inventory drawdown. Murban oil price rose to $72.60 (Sh7,841) per barrel on July 8 from $72.15 (Sh7,792.20) per barrel on July 1, a situation that might have put Kenya’s currency under pressure.

A spike in the price of oil is responsible for the recent increase in the cost of living, with motorists paying Sh37.60 more for a litre of petrol in June compared to the same month last year.

This was an increase of 41.7 per cent from the Sh90.34 that motorists paid in June last year for a litre of petrol, attributed to the depressed global prices of crude oil for the better part of 2020 at the height of Covid-19 that saw a lot of economies shut down.

While much of the increase in the retail price of petrol can be attributed to increased taxation of petroleum products, the global prices of crude oil have also been going up as the economy recovers from Covid-19 and demand goes up.

Pressure on the Shilling might also come from China, Kenya’s largest trading partner where firms have started increasing factory prices due to an increase in the cost of inputs.

This increase is likely to be passed on to Kenyan importers who will then require more hard currencies to buy these products.

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