The fall of the shilling inflates the external debt by 69 billion shillings
The depreciation of the shilling inflated Kenya’s external debt by the equivalent of 69 billion shillings in the first four months of this year, reversing a real decline of $250 million in the hard currency value of borrowings during the period.
The latest public debt data from the Central Bank of Kenya (CBK) shows that external debt measured in dollars stood at $36.9 billion at the end of December, equivalent to 4,174 billion shillings at the exchange rate. current exchange rate of 113.14 for a greenback.
The debt fell to $36.65 billion at the end of April due to some principal repayments to China and the Trade and Development Bank (TDB), but the equivalent in shillings rose to 4,243 billion shillings after the exchange rate weakened to an average of 115.80.
The spread reflects the risk carried by a weakened currency on external debt, where the Treasury needs more shillings to service the debt, including interest payments.
The shilling has depreciated against the dollar by 3.9% this year, trading at an average of 117.7 on Monday, meaning June’s external debt figures will likely reflect worsening currency losses on the country’s foreign payment obligations.
There are therefore fears that the depreciation of the shilling will hurt the already stretched debt ratios that measure debt sustainability.
Kenya’s debt-to-gross domestic product ratio, estimated at 68% in June 2021, is expected to reach 72.6% by the end of the 2022/23 financial year.
This could increase at a faster rate if the shilling continues to fall and the government fails to reduce its budget deficit, amid rising interest costs for new debt issues.
NCBA analysts said in a weekly fixed income report that the combination of higher borrowing costs for new loans and a weaker shilling would likely result in debt service obligations worth more than 35% of total expenditure in the 2022/23 financial year.
Analysts have warned that these public debt problems will likely steer the government away from its fiscal consolidation plan given the limited room it has to cut spending.
The government is likely to increase its borrowing domestically and from bilateral lenders as rising interest rates make it more expensive to issue new Eurobonds.