Depreciating Shilling Pushes up Kenya’s Debt by Sh.500 Billion

Kenya’s depreciating currency cost the country nearly half a trillion shillings on the external public debt burden alone, eroding the government’s efforts to pay external lenders.

The shilling, which continues to present a challenge to the economy mainly in servicing of external debts and importation of goods by businesses, devalued by 9.3 percent from 107.85 units by end of June 2021 to 117.83 by June 30 this year.

A new report by the National Treasury shows that while Kenya’s external debt stock in dollar terms reduced by five percent from $37.1 billion to $35.3 billion in the year to June 2022, in Kenyan shilling terms it increased by Sh156 billion, to Sh4.16 trillion.

“The increase in the public debt is attributed to external loan disbursements, exchange rate fluctuation and the uptake of domestic debt during the period,” Treasury stated in the 2021/22 last quarterly budget and economic review report. 

The increase in the external debt burden was despite the government’s spending to service loans from other countries, multilateral lenders and foreign commercial banks.

Between July 1, 2021 and June 30, 2022, Treasury reported that taxpayers paid a total of Sh305.3 billion to external lenders.

This shows the full impact of the depreciated currency on the external debt burden in the last financial year alone totalled Sh461 billion, or at least 12 percent of the country’s 2021/22 budget.

“By the end of June 2022, the total cumulative debt service payments to external creditors amounted to Sh305.3 billion. This comprised Sh184.5 billion (60.4 percent) principal and Sh120.8 billion (39.6 percent) interest,” Treasury stated.

The government spent the highest amount Sh 152 billion on repayments to commercial lenders, bilateral lenders Sh102 billion and multilateral lenders Sh51 billion.

Yet the multilateral lenders’ debt stock still rose by Sh265 billion, commercial lender’s debt stock only reduced by Sh74 billion and bilateral lenders’ by Sh30 billion.

Had the shilling remained at 107.85 units in mean exchange rate as was the case by the end of June 2021, the external debt stock by end of June 2022 would have been Sh3.8 trillion.

“In dollar terms, external public debt stock declined by US$1.8 billion from US$37.08 billion by the end of June 2021 to US$35.26 billion by the end of June 2022. This comprised debt owed to multilateral (46.3 percent), bilateral (26.6 percent), commercial banks (26.8 percent), and Suppliers Credit (0.3 percent),” Treasury stated.

The amount by which the debt was reduced is equivalent to Sh214.6 billion, by June 30, 2022 exchange rate terms.

The punishing cost of the depreciating currency, which has remained on an accelerated devaluation trend for months now, is not only being felt by taxpayers while servicing the external debts, but also by businesses while importing goods since they have to purchase dollars first.

In recent months, companies have complained of an acute shortage and high cost of dollars in the market, with some being forced to scale down operations.

The final consumer remains the ultimate victim, as businesses pass on the cost when setting prices. This has led to higher prices of commodities and increased overall cost of living in the country.