Kenya's debt up Sh300bn in six months on weak shilling

The local currency which traded Sh112 against the US dollar in January is now at Sh120, having shed seven units in just six months. 

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

According to the National Treasury, the country's external debt dropped from $37.06 billion in December last year to $36.9 billion in June. 

Despite the drop, the country's obligation has increased by Sh300 billion as the shilling continues to lose value against major international currencies. 

Yesterday, a Financial analyst at FX Pesa Rufas Kamau told the Star that Kenya's debt obligation is likely to heighten on weakening shilling till end of the first quarter in 2023.

''We should expect more heat on the public debt as the shilling continues to depreciate to at least 140-145 units against the greenback by end of the year,''said Kamau. 

If the shilling trades at 145 units against the dollar as projected, the country debt will grow by Sh1.3 trillion year-on-year.

Kamau said most of Kenya's external debt which accounts for 51 per cent of the country's total public debt is denominated in US dollar, with latest data from the National Treasury showing that this 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.

''The Kenyan government should work to stabilise the shilling by adopting a number of strategies. It should, perhaps consider offering stimulus packages on base products instead of raising the base lending rate,'' Kamau said. 

In April, PKF Consulting projected adverse effects of the weakening shilling on the public debt, calling on the government to adopt austerity measures. 

The audit firm termed ballooning debt as worrisome, projecting the shilling to hit 120 levels this month. 

It however, said the debt can  be sustainable if the economy grows 7-10 per cent. 

PKF CEO Alpesh Vadher told the Star that if the country fails to observe fiscal discipline amid weakening shilling, it will have no option but to restructure some of its external debt. 

His sentiments were echoed by FX Pesa yesterday, with the firm fearing that the country could likely fail to honor its debt obligations if the shilling continues to tumble. 

''The weak currency situation is already hitting some countries across the globe, with some like Sri Lanka defaulting on international loans. Kenya is not an exception,''Kamau of FX Pesa said.

He added that the planned removal of oil subsidy plan in Kenya will pile more pressure on the weak shilling and the general cost of living. 

He is however optimistic that the strengthening of the dollar will likely ease in the first three months of 2023, reducing pressure on weaker currencies. 

Early this year, a World Bank report named Kenya alongside Tunisia, Egypt, Ethiopia, and Argentina as some of countries groaning under their own giant piles of debt.

“There are many more Sri Lankas on the way. There are lots of countries in precarious situations,” the World Bank’s chief Economist Carmen Reinhart told Reuters.

In May, 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 National Treasury maintains that the country's debt is manageable.