Kenya is facing a substantial increase in interest payments on its loans, driven by a weakening shilling. The National Treasury expects these payments to rise sharply, reaching Ksh 918.9 billion for the fiscal year ending June 2024. This marks a significant 33.7 percent increase from the previous year’s Ksh 687.3 billion.
The key factors contributing to this surge are the depreciation of the Kenyan shilling and elevated domestic interest rates. The shilling’s decline, with an exchange rate of 147.26 against the US dollar on Monday, reflects a 19.3 percent loss since the year began. Stellar Swakei, a senior research associate at Standard Investment Bank, noted that external debt had increased by approximately Ksh 649.6 billion by June 2023, coinciding with a 13.9 percent depreciation of the shilling since the year’s start. This inevitably leads to higher debt servicing costs.
The rise in interest payments is prominent in foreign loans, which have increased by Ksh 125.6 billion to Ksh 272.5 billion. At the same time, domestic interest payments have risen by Ksh 18.1 billion to Ksh 646.4 billion. The Kenyan government’s dependence on costly commercial loans for large-scale projects, such as infrastructure development, has been a contributing factor.
Foreign interest payments have surged by an astonishing 2,355 percent from Ksh 11.1 billion in the 2012/13 financial year to Ksh 272.5 billion. In comparison, interest payments have risen steadily over the past decade. President William Ruto’s administration now faces increasing pressure due to these interest payment obligations.
The depreciation of the shilling has raised concerns about the country’s vulnerability to currency fluctuations and exchange rate risks, as noted by Dr. Margaret Nyakang’o, the Controller of Budget. She emphasized that the continued depreciation of the Kenyan shilling would necessitate larger amounts for loan repayments, which could erode the government’s fiscal space, limiting the implementation of critical policies and programs.
To mitigate budget deficits, President Ruto’s administration has introduced various tax measures. However, the substantial increase in interest payments, classified as recurrent expenditure funded by taxes, adds to the challenges faced by the government.
Amidst tightening liquidity in the global financial market, Kenya is expected to make a $2 billion (Ksh 294.5 billion) bullet payment for a maturing Eurobond in June next year, adding to the country’s external obligations.
By: Montel Kamau
Serrari Financial Analyst
26th September, 2023
