Kenya to spend $533 million on external debt servicing in July

Kenya is set to spend approximately $533 million (Sh69 billion) servicing its external debt this month, exerting fresh pressure on its forex reserves. The reserves were recently replenished through a World Bank loan.

SGR loans account for 81 percent of July debt payments

According to public debt data from Bretton Woods, biannual payments to China for loans contracted in 2014 for the construction of the standard gauge railway (SGR) will constitute 81% or $433 million (Sh56.1 billion) of the total July external debt payments.

The loans, taken to build the Mombasa-Naivasha railway, were denominated in dollars and included both concessional and commercial terms with floating interest rates.

Other significant debt payments in July

The remaining debt payments for July are directed towards various multilateral and bilateral lenders. These include the Eastern and Southern African Trade and Development Bank (TDB) at $22.3 million (Sh2.9 billion), France at $18.6 million (Sh2.4 billion), and the World Bank at $12.9 million (Sh1.7 billion).

Kenya will pay $31.5 million (Sh4.1 billion) in semi-annual interest for a $1 billion Eurobond issued in June 2021, which carries an annual interest rate of 6.3%.

Impact on Kenya’s forex reserves

The Central Bank of Kenya’s (CBK) official forex reserves, which were at $7.89 billion (Sh1.02 trillion) at the end of last week, will be utilised for these payments. These reserves equate to 4.1 months of import cover.

The reserves had fallen below the required four-month cover since last year but were bolstered by a $1.2 billion World Bank loan drawn down last month.

This infusion increased the reserves to $8.32 billion by June 20. $500 million from these reserves were used to repay the remaining principal of the $2 billion Eurobond from 2014, which was largely bought back in February.

Rising costs in Kenya due to currency depreciation

Under former president Uhuru Kenyatta’s administration, Kenya borrowed extensively from China to finance infrastructure projects such as roads, power plants, railways, and bridges.

These projects were intended to stimulate economic growth and create jobs for the youth.

The cost of servicing these loans has increased over the past few years due to the depreciation of the Kenyan shilling against the dollar. This depreciation has also raised the volume of external debt in shilling terms upon conversion.

Kenya’s commitment to servicing its external debt, particularly the substantial SGR loans from China, continues to put pressure on its forex reserves.

The fluctuating exchange rates and rising interest costs add to the financial strain, highlighting the complexities of managing large-scale international loans in a volatile economic environment.