Weak shilling, global rate rises cost Kenya Sh27bn

The Treasury said aggressive interest rate increases by rich countries’ central banks amid the persistent weakness of the shilling cost Kenya an additional Sh27.23 billion in paying off foreign debt, eroding the budget for development projects.

The Treasury received lawmakers’ approval to increase spending on foreign debt in the current fiscal year ending Friday to Sh389.45 billion from Sh362.22 billion, which was expected in February.

The request to increase spending on external debt by 7.5 percent through the second supplementary budget was approved last week.

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Aaron Sirima, director general of the Treasury’s Office of Public Debt Management, said increased spending by external creditors was necessary because of increases in floating rate rules.

International lenders largely use the London Interbank Offered Rate (LIBOR), which will be phased out this month, and the US key rate as reference rates to which they add their margins when pricing loans.

Dr. Sirima told The daily business.

The dollar’s three-month LIBOR rate this year exceeded five percent for the first time since the global financial crisis 15 years ago, while the main interest rate in the United States is more than eight percentage points higher than about 4.38 percent a year ago.

The recent jumps in the global benchmark rate have been largely on the back of sustained interest rate increases by global central banks in the race to rein in stubbornly rising inflationary pressures, which are currently being driven by services price growth.

The rising debt costs were further pressured by the significant depreciation of the shilling against the US dollar.

The Kenyan currency has defied the central bank’s foreign exchange symbol and a government-backed agreement to import fuel on credit, shedding about 13.84 percent of its value to the dollar since the beginning of the year and about a fifth last year.

Central Bank of Kenya Governor Kamau Thug said the slide in the shilling, which usually increases the burden of paying foreign debt on taxpayers, should have been deeper had it not been for the deal struck by the William Ruto administration with Saudi Arabia and the United States. The UAE imports petroleum products in a six-month credit window from March.

Dr. Thuj said the deal saved the country about $500 million that could have been spent by oil importers, helping relieve pressure caused by the mismatch between supply and demand for the US currency.

Treasury data shows interest expenditure on foreign debt rose by Sh16.50 billion, or 11.92 percent, to Sh154.94 billion, while recoveries jumped by Sh10.74 billion, or 4.80 percent, to Sh234.51 billion, both compared to Previous forecast in February.

Debt-service costs have soared in recent years after the grace period extended by rich countries, particularly China, expired amid fast maturing domestic debt repayments.

The Treasury spent nearly Ksh1.02 trillion on domestic and foreign debt repayments for the 11 months to May. That was the equivalent of 58.60 per cent of the Sh1.74 trillion tax revenue in the review period, hampering spending on development projects in a country with growing levels of poverty and high youth unemployment.

This left little money for building roads and affordable housing, revamping the ailing health sector and setting up low-cost power plants – all key to industrial development and job creation.

“I think the national treasury fiscal framework has integrated all of these debt service payments, including the impact of the exchange rate appreciation,” said Dr Thug.

“They have a plan to reduce the overall fiscal deficit and achieve a sustainable debt and fiscal position in the medium term.”

The increasing burden of debt-service costs on taxpayers is a reflection of increased borrowing during the previous administration of Uhuru Kenyatta, where Dr. Ruto served as vice president, to build infrastructure such as roads, power lines and a modern railway.

Kenya’s indebtedness has been underlined by international bond offerings, a combination of Chinese and commercial loans syndicated over the years that are now straining its finances as the loans come due.

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The International Monetary Fund and the World Bank Group have since 2020 rated Kenya as at high risk of debt distress since 2020 as a result of persistent large budget deficits, which are being bridged through borrowing.

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