Kenya plans to spend about $533 million (Sh69 billion) on external debt servicing this month, putting fresh pressure on foreign exchange reserves recently replenished with proceeds from a World Bank loan.
Public debt data compiled by the Bretton Woods Institution shows that semi-annual payments to China for loans contracted since 2014 to build the Standard Gauge Railway will account for 81%, or $433 million (Sh56.1 billion), of external debt payments in July.
January and July typically account for the bulk of the country’s annual external debt payments due on General Reserve Fund loans.
Kenya borrowed $5.08 billion (Ksh659 billion at current exchange rate) in 2014 and 2015 to build the Mombasa-Naivasha railway.
The SGR loans, which were on a mix of concessional and commercial terms, were denominated in dollars and had two variable interest rates, which were set at the time of issuance at either 3.6% or three per cent above the London Interbank Offered Rate (Libor) – which has since been discontinued.
The rest of the July debt payments go to a mix of multilateral and bilateral lenders, the most significant of which are the Eastern and Southern African Trade and Development Bank (TDB) with $22.3 million (Sh2.9 billion), France ($18.6 million or Sh2.4 billion) and the World Bank ($12.9 million or Sh1.7 billion).
The government is also paying $31.5 million (Sh4.1 billion) in semi-annual interest on a $1 billion Eurobond issued in June 2021, which carries an annual interest cost of 6.3 percent.
The loans are being repaid from the Central Bank of Kenya’s official foreign exchange reserves, which at the end of last week stood at $7.89 billion (Ksh1.02 trillion), equivalent to 4.1 months of import cover.
Reserves, which have been below the required level for four months since last year, were boosted by proceeds from a $1.2 billion loan from the World Bank that was drawn down in the middle of last month.
The loan boosted reserves to $8.32 billion by June 20, after which the government used $500 million to repay the remaining $2 billion in Eurobonds issued in 2014, the bulk of which were repurchased in February.
Under retired President Uhuru Kenyatta, Kenya has borrowed from China to build roads, power plants, railways and bridges, with the aim of stimulating the economy and creating jobs for the youth.
Meanwhile in 2014, the country turned to the Eurobond market to finance its budget deficit after re-establishing its economy and transitioning to a lower-middle-income economy, limiting access to highly concessional loans typically granted to low-income countries.
The cost of servicing these loans has risen over the past few years due to the weakening of the shilling against the dollar, a factor that has also led to an increase in the volume of external debt denominated in shillings when converted.
Interest on external loans is typically paid semi-annually – with bilateral and multilateral loans being combined into principal repayment – while the principal on sovereign bonds and syndicated loans is repaid in a single payment at the end of the loan life.
