Kenya faces steeper interest on foreign debts due to weaker shilling

The shilling has shed 4.4 per cent in value against the dollar this year, currently exchanging at Sh90.30 to the US currency. PHOTO | FILE 

By CHARLES MWANIKI

Posted  Sunday, December 7  2014 at  18:25

In Summary

• External debt and interest repayments, which have to be made in dollars, will become more expensive for the country in the shilling equivalent of the amounts.

Kenya is staring at increased interest payments on foreign debt due to a depreciating shilling.

The shilling has shed 4.4 per cent in value against the dollar this year, currently exchanging at Sh90.30 to the US currency.

This means that external debt and interest repayments, which have to be made in dollars, will become more expensive for the country in the shilling equivalent of the amounts.

The Treasury has indicated in the latest review of economic and budgetary developments for the quarter ending September 2014 that it paid 6.2 per cent more than its target on the principal and interest on guaranteed loans for parastatals due to the shilling’s depreciation.

This underlines the extent to which the depreciation of the local unit is affecting debt repayments.

“Cumulative principal and interest payments of guaranteed loans to parastatals with liquidity problems amounted to Sh181.2 million against a target of Sh170.6 million for the period ending September 30, 2014. The variance is attributed to differences in exchange rate movements,” the review by the Treasury said.

If the same level of variance were to be applied to the rising stock of external debt that is mainly coming from commercial lenders, the increase in shilling terms could run into hundreds of millions.

READ: Treasury wants external debt ceiling raised to Sh2.2 trillion

At the end of September 2014, the total cumulative debt service payments to external creditors amounted to Sh63.7 billion. This comprised Sh59.8 billion (94 per cent) principal and Sh3.8 billion (six per cent) interest.

The repayment target for the Treasury was Sh61.9 billion, but due to a drop in external debt stock in the three months to September mainly due to the retirement of the Sh54 billion ($600 million) syndicated loan.

In dollar terms, total external public debt stock decreased by $807.8 million (S72.6 billion) from $12.99 billion (Sh1.169 trillion) in June 2014 to $12.18 billion (Sh1.096 trillion) by end of September 2014.

The inflows from the Eurobond had been factored in for the quarter ending June 2014.

The country has been attracted to foreign borrowing partly due to interest rates that were lower than domestic levels. The state was also out to reduce the crowding-out effect of domestic financing on the private sector in order to grow the economy and push interest rates further down.

The Treasury has been looking to shift the focus of its borrowing from the domestic market to the external market.

“Cumulative external financing by end of September 2014 amounted to a net borrowing of Sh94.8 billion compared to a net borrowing of Sh4.1 billion in the same period of the 2013-14 financial year,” said the Treasury in the report.