Experts are warning that this is likely to hit Sh500 billion or 5.6 per cent of the country's total public debt by March as the US plans the last Fed rate review in an effort to tame the rising cost of living.
On Wednesday, the shilling hit a new low against the greenback to trade at 124.05 units. The local currency was trading at 113.49 to the dollar same period last year.
According to the latest Central Bank of Kenya weekly bulletin, the country's external debt is at $36.5 billion or Sh4.53 trillion at the current rate of Sh124 to the US dollar.
On January 18, 2022, the country's external debt was at $36.7 billion or Sh4.16 trillion, with the dollar retailing at Sh113.47.
This shows the country's external debt obligation has risen by Sh370 billion in the past 12 months despite it reducing by close to Sh20 billion.
The Kenyan shilling is among the continental currencies that have significantly lost to a strong dollar on tough monetary stances as countries put in measures to contain the highest inflation in 40 years.
Markets expect the U.S. Federal Reserve (Fed) to raise rates again on February 1, probably by 0.25 percentage points to 4.5-4.75 per cent.
However, there’s a reasonable chance the Fed opts for a larger 0.5 percentage point hike.
The February decision is the first of eight scheduled meetings for the Fed to set interest rates this year.
In mid-December, the Federal Reserve raised its benchmark interest rate to the highest level in 15 years, indicating the fight against inflation is not over despite promising signs.
Keeping with expectations, the rate-setting Federal Open Market Committee voted to boost the overnight borrowing rate by half a percentage point, taking it to a targeted range between 4.25 and 4.5 per cent.
The increase broke a string of four straight three-quarter point hikes, the most aggressive policy moves since the early 1980s.
According to Amana Capital, a further increase in the Fed rate this year is likely to push the shilling to 125 units against the greenback or worse if the recession bells get louder.
"This could easily push the country's external debt obligation up by a historic Sh500 billion as most of it is denominated in the US dollar,'' Amana Capital says in its latest projection.
It adds that the figure could be higher if the country's currency is properly valued against the greenback.
Several analysts including the International Monetary Fund and Renaissance Capital believe that the shilling is overvalued by at least 17 per cent.
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 this accounts for 71 per cent of external debt.
Other currencies including Euro, the Japanese Yen, the Chinese Yuan, and the Sterling Pound hold debts at 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.
President William Ruto's administration has vowed to deal with the rising public debt currently at Sh8.9 trillion.
National Treasury CS Njuguna Ndung'u said the exchequer will focus on concessional loans to retire high domestic and external debts.
However since assuming office, the new administration has shifted attention to domestic debt even as the external one threatens to burst on a weak shilling.
The proposal would see Kenya tap for cheap financing from institutions such as the World Bank and the International Monetary Fund (IMF) and deploy the proceeds to clear loans contracted from the domestic market.
According to National Treasury data, domestic interest costs across the 2021-22 financial year stood at Sh456.8 billion or 79.1 per cent of total interest costs in the period with foreign interest costs sitting at a lower Sh120.8 billion.
