Shilling fall pushing up Kenya's foreign debt

The Kenya shilling has dropped five units in value during the period under review

In Summary
  • In June last year, the shilling averaged 107.60 against the greenback compared to 115 today
  • The country's total public debt is at Sh8.2 trillion or 70 per cent of Gross Domestic Product (GDP). 
Treasury Cabinet Secretary Ukur Yatani poses for a photo at Parliament Buildings on June 11, 2020.
Treasury Cabinet Secretary Ukur Yatani poses for a photo at Parliament Buildings on June 11, 2020.

A weak shilling is likely to increase Kenya's debt obligation by more than  Sh500 billion by December if the current depreciation trend prevails.  

On Monday, financial consulting firm, PKF projected the shilling to trade as high as 120 units against the US dollar by end of the year. It is currently trading at 115.10.

The devaluation of the country's currency has already pushed up its obligation on external debt by Sh271 billion since June last year, despite dropping to $36.9 billion from $37.06 billion.

Last June, the shilling averaged 107.60 against the greenback, putting the country's external debt at Sh3.98 trillion. However, with the shilling now trading at 115, the external debt is at Sh4.25 trillion. 

The country's debt increases by Sh40 billion any time the shilling drops a unit against the US dollar.

Most of Kenya's external debt which accounts for 51 per cent of the country's total public debt is denominated in US dollars, with the latest data from the National Treasury showing that it accounts for 71 per cent of external debt.

Other currencies including Euro, the Japanese Yen, the Chinese Yuan, and the Sterling Pound hold debt to 18.0 per cent, 6.6 percent, 5.4 per cent and 2.5 per cent, respectively.

According to the exchequer's public debt management report for 2019/2020, public debt acquired in the US currency has grown from 42.3 per cent in 2014 on account of commercial debts and sovereign bonds.

Yesterday, PKF termed ballooning debt as worrisome but maintained that it can be sustainable if the economy grows 7-10 per cent. It has predicted a growth of five per cent in the current financial year ending June 30. 

PKF CEO Alpesh Vadher told the Star that the country will have no option but to restructure some of its external debt. 

''An economic growth rate of at least seven per cent is unlikely in the current situation considering the global supply chain disruption by Covid-19 and currently the ongoing Russian invasion of Ukraine,'' Vadher said.

The country's total public debt is at Sh8.2 trillion or 70 per cent of Gross Domestic Product (GDP). 

Kenya’s risk of external debt distress was downgraded from moderate to high.

The International Monetary Fund also downgraded the country’s debt-carrying capacity from strong to medium in April 2021. However, the report reveals that Kenya’s debt remains sustainable.

The government is pushing a plan to revert the debt ceiling to a measure of GDP as opposed to an absolute figure, a move opposed by economists and civil rights agencies. 

Last month, the National Treasury issued a notice seeking to amend the Public Finance Management Act, 2012, to cap borrowing at 55 per cent of GDP in the present value term.

The country is looking at a budget deficit of Sh846 billion in the financial year starting July, a move likely to push the current debt to slightly above Sh9 trillion.

It, however, expects the deficit to decline to Sh675 billion by the end of the medium term. The government is expected to spend close to Sh1 trillion in financing debt deficit for the ongoing financial year. 

 Michael Mburugu, Regional Tax partner at PKF has urged the Kenyan government to establish a National Tax Policy – a fact that the Cabinet Secretary of the National Treasury acknowledged in the 2021/22 budget statement.

He insists that this will enable it sustainably generate revenue, and cut external borrowing while cushioning citizens and businesses from the high cost of living and doing business. 

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