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

By Dominic Omondi | November 9th 2021
By Dominic Omondi | November 9th 2021

Imagine leaving the banking hall one afternoon in June this year after confirming that your outstanding loan stands at Sh100,000.

But five months later, you are told that you now owe the bank Sh103,440.

“How is that even possible?” you wonder loudly.

At this, the bank teller curtly tells you: “Your loan was in US dollars, remember?”

Then it hits you. Back in June, a dollar fetched Sh107.85. It was still weak compared to the pre-pandemic exchange rate of 102.4, but today it is exchanging 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, has ballooned by Sh137.76 billion.  

By the end of June, the country’s external debt, in dollars, was $37.23 billion.

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

Suddenly, the shilling was on a free-fall with most analysts unable to precisely give a conclusive reason for it.

By the time of going to press yesterday, one dollar fetched Sh111.59. This means that Kenya’s external debt has since ballooned to Sh4.154 trillion. A volatile exchange rate puts pressure on the public finances as the country now needs more of the 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 sits at the heart of why the Central Bank of Kenya (CBK) is obsessed with the currency,” said an analyst, who requested anonymity.

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

The regulator insists that it only comes into the market to smoothen the rough edges -volatility that might lead to a financial crisis.

But analysts reckon that with a little bit of financial discipline, the country would have avoided this additional debt burden and used the money for other critical needs such as security, healthcare or education.

It is even worse that a big chunk of Kenya’s debt (close to seven-tenths) is in dollars.

By the end of June this year, the country’s total debt stood at Sh7.71 trillion, an increase of Sh1.02 trillion from Sh6.69 trillion in the same month last year.

This means the government has been borrowing on average Sh2.8 billion per day, which experts say is likely to hurt ordinary Kenyans if the trend continues.

Since March last year when the country recorded its first case of Covid-19, the government has borrowed Sh1.43 trillion. 

Treasury has argued that elevated borrowing since March last year reflects the tough conditions brought about by the Covid-19 pandemic, which reduced State revenues. In one of its documents, the National Treasury attributed the increase in public debt stock to increased disbursements geared towards budget support, Covid containment measures, financing of ongoing and new development projects and exchange rate fluctuations. 

However, critics point an accusing finger at corruption and wastage for contributing to a bloated expenditure, translating into binge-borrowing.

Debt denominated in foreign currencies constituted 51.2 per cent of total debt, a situation that shields the country from exposure to foreign exchange rate risks is moderate, according to Treasury.

“The government is making every effort to minimise its external exposure to exchange rate fluctuations by selecting the optimal risk minimising currency composition of debt. This has been made possible by decreasing the uptake of debt denominated in US dollars and promoting exports of goods and services,” said Treasury.

The proportion of external debt held in US dollars declined from 67.3 per cent in June last year to 66 per cent this June.

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

“It raises concern about the sustainability of Kenya’s debt. As the shilling continues to depreciate, it will continue to be an issue,” said Wanga.

The share of external debt in the Euro rose to 19.4 per cent as of the end of June this year from 18.0 per cent in June last year.

As of the end of June, 6.3 per cent of external debt was denominated in Japanese Yen, 5.6 per cent in Yuan, 2.5 per cent in Sterling Pounds, while other currencies accounted for 0.2 per cent.

Borrowing from commercial banks (syndicated loans) and Chinese loans such as the building of the Standard Gauge Railway and Eurobonds have raised the share of Kenya’s dollar-denominated loans.

Depreciation of the shilling against the greenback has as a result given Treasury mandarins nightmares.

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

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

“Before you can start building under the water, at least plug the hole,” said Mr Ndoho. Unfortunately, the stoppage has mostly been on syndicated loans, which are given by a group of banks.

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

The government, which recently issued its fourth Eurobond, might not be severing ties with the debt financing instrument as it still believes it has a good name.

There is a lot of liquidity in the market that it believes it can tap for cash management purposes.

“Eurobond will always be more attractive to governments than even the multilateral as it does not come with any strings attached. It is a purely commercial arrangement,” added Ndoho.

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

The remaining Sh3.7 trillion is domestic, which the government gets largely by issuing Treasury bills, a short-term government debt, and the longer-term Treasury bonds. 

President Uhuru Kenyatta’s government has now borrowed Sh5.82 trillion in eight years since 2013. 

This is nearly five times what former President Mwai Kibaki borrowed in 10 years - Sh1.2 trillion - from June 2003 to June 2013. 

President Kenyatta insists that most of the borrowed money has been used to grow the economy, reflected in the expansion of GDP, or the measure of the national cake, from Sh4.3 trillion in 2012 to Sh10.3 trillion by the end of last year.

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