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Pressure as interest on foreign loans up 145pc

By Dominic Omondi | October 28th 2018

Signs that Kenya might experience difficulties repaying its external debt have started showing, putting the Central Bank of Kenya (CBK) on high alert.

Latest data from CBK shows payment of interest on external loans more than doubled in the first two months of the current financial year (FY) to Sh19 billion compared to Sh7.7 billion that the Government paid by August last year.

This means in two months, the country’s foreign interest payments exceeded its expenditure on the same for the entire FY 2013/14, President Uhuru Kenyatta’s first financial calendar in office, when the Government spent Sh14.9 billion.

Experts have attributed this to increased uptake of expensive, faster maturing loans such as the Eurobond against stagnant revenues, particularly foreign exchange earnings which are critical for repayment of dollar-denominated loans.

A surge in spending on foreign interests combined with an external debt repayment of Sh250.3 billion, including a Eurobond bullet payment of Sh78 billion in the current financial year, is likely to pile pressure on the shilling which has so far held steady.


An analysis by National Treasury in its latest Medium Term Strategy indicated that about 50 per cent of the total Government debt portfolio is exposed to exchange rate fluctuation, particularly to the US dollar, which has been strengthening following improved economic conditions in the home country.

In the debt strategy paper, Treasury agreed that the country’s projected debt portfolio as at June, 2018 was characterised by “low but with a marginal increase in interest payments as a share of GDP.”

Kenya’s debt sustainability analyses (DSA) by the International Monetary Fund (IMF) found that an increasing load of foreign interest payment was one of the factors that contributed to the country’s risk of defaulting on its external debt repayment, technically known as debt distress, with the global lender reclassifying Kenya’s the risk from low to moderate. 

Following the reclassification, Kenya joins 25 countries including Congo Republic, Burkina Faso, Liberia, Sierra Leone, Togo.

While Kenya has not breached all debt burden indicators- meaning debt is not growing faster than income - the new ranking means any slight disturbance on the country’s income, like a sharp spike in the global prices of oil, is likely to put pressure on the shilling with the country experiencing difficulties in debt repayment. 

“The higher level of debt, together with rising reliance on non-concessional borrowing, have raised fiscal vulnerabilities and increased interest payments on public debt to nearly one fifth of revenue, placing Kenya in the top quartile among its peers”, the IMF said in a report released Tuesday.


Treasury has insisted the country’s debt is sustainable, but has admitted that there are risks with the debt obligation growing faster than its revenues.

Its DSA showed that the country’s debt service-to-revenue ratio, used to test a country’s ability to repay its debt by comparing debt to revenue, stands at 30.5 in 2018 against a threshold of 30.

This is the only debt burden indicator that has been breached, according to Treasury’s analysis with officials insisting this will be fixed in the near term.


“Going forward, the debt service-to-revenue ratio is expected to decline from 35.8 per cent in 2017 to about 24.3 per cent in 2026,” said Treasury.

However, IMF in its analysis as at June found three external debt indicators had been breached.

“Kenya’s risk of external debt distress has increased from low to moderate. This reflects the breach of three external debt indicators—external debt service-to-export ratio, external debt service-to-revenue ratio, and the present value of external debt to export ratio—for an extended period of time under the most extreme shock,” added the IMF.

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