The Treasury is bracing itself for a fresh raid on Kenya’s foreign exchange reserves to fulfil external debt service worth Sh63.5 billion ($451.3 million) this month, with the bulk of the funds covering the biannual repayments for the standard gauge railway (SGR) loans procured from China.
A World Bank analysis of Kenya’s external debt obligations shows significant payments to a mix of bilateral, commercial and multilateral lenders in July, including France, China, the Eastern & Southern African Trade & Development Bank (TDB), Eurobond creditors and the Bretton Woods institution itself. January and July account for the biggest debt service outflows in the year due to the SGR repayments, which will this month gobble up to Sh50.1 billion ($356.4 million).
The real impact of these large repayments on Kenya’s finances is amplified by the continued weakening of the shilling against the dollar, meaning that the Treasury is spending a larger shilling equivalent to procure hard currency from the Central Bank of Kenya (CBK) to settle these external obligations.
For instance, in July 2022, Kenya’s external debt service charge stood at $459.2 million, which at the average exchange rate to the dollar of 118.30 during that month was equivalent to Sh54.3 billion.
This means that Kenya is spending an extra Sh10 billion to service this month’s debt compared to July 2022, even though the actual dollar amount has fallen by $8 million.
The Auditor-General has already flagged this exchange risk on the country’s foreign debt pile, which in April crossed the five trillion mark for the first time to stand at Sh5.09 trillion.
The audit office revealed that in the first half of the 2022/23 fiscal year, the Treasury was forced to raise an additional Sh3.4 billion to cover a shortfall in the budgeted foreign debt payments due to the depreciation of the shilling.
As such, Auditor-General Nancy Gathungu advised the Treasury to consider hedging as an option to control this negative forex exposure on external debt.
In terms of specific repayments this month, China tops the bill at $356.4 million (Sh50.1 billion) in interest and principal repayments, followed by a semi-annual interest repayment of $31.5 million (Sh4.4 billion) on the $1 billion Eurobond the country floated in mid-2021.
The other payments include $20 million (Sh2.8 billion) to the TDB, $18.7 million (Sh2.6 billion) to France and $10.2 million (Sh1.4 billion) due to the International Development Association, the World Bank’s concessional lending arm.
These payments will come from the official forex reserves held by the CBK, which the State utilises for external loans service as well as importing critical goods such as drugs and fertiliser from the global market.
By the end of last week, the reserves stood at $7.47 billion (Sh1.05 trillion), enough to cover 4.12 months of imports.
